I spend a lot of time searching for excellent long term investments that are priced at a discount to value. Finding ideal business investments is time consuming and takes a lot of reading and analytical research. Often you’ll wander down the path of what looks like a good potential investment only to come upon a piece of information or data that says don’t go any further. Other times you’ll find something good only to complete your research, and recent news comes out confirming your research and sends the stock higher now making it more expensive.
When I search for an investment idea I start with the mindset of personally becoming the sole owner of any business I might consider. Thinking this way forces me to consider the best use of my capital, and the risk and potential returns. This approach has forced me to develop a very specific core framework or list of traits that I look for in a business.
In the past I used to chase an investment idea based on the idea rather than understanding the core framework of the business itself. Any worthwhile long term investment has to have critical important components in order for it to succeed, and the business’s basic core framework is critical for long term success. Most of the good long term investments that work have similar business frameworks or traits.
Refining Your Ideal Business List
In order to refine these specific lists of traits I’ve built a list over time of what I feel are most important to a successful business. Every trait starts out with an idea and then it gets refined. As an example, many would consider a good CEO or founder as a key element of a successful business. Yet, people are people and a CEO or founder can make poor decisions or choices (such as new Coke) at some point, and affect the growth of the business.
The trait of a CEO or founder having the ability to cause failure to a business means that the business must sell products or services that can supersede the failures of a human’s choice. Ask yourself if the company would exist in its same form if the founder or CEO wasn’t at the helm any longer. It’s this type of thinking which led me to understand that instead of searching for a great investment I needed to create the ideal business model and it’s traits, and then find companies that closely meet these traits.
The first couple of traits on my list are the most important traits. Most of the ideas I look at should match up with them. If the business I am considering matches then I review the other traits to see how many are inherent within the core framework of the business. If the business matches up well with my list then I start the analytics work which comprises digging into the 10-Q reports and reading everything I can find about the company. When reading a 10-Q report the first topic I like to start with is the businesses views of its risk and competitors. It can be an eye opener.
My list of what makes the perfect business is derived from running my own business and years of reading others ideas and research. In reality finding a real business that will match up item for item or trait for trait one hundred percent with the list is limited. Yet what my list does is help to keep me away from owning the businesses that may seem like good businesses, but are questionable in one area or another and need further research or are ruled out. By taking the long term sole owner view tough questions get asked, since you would have a lot of money at risk.
Defining your view of what your ideal business looks like before searching for an investment helps to narrow down the list of businesses that would make sense for long term ownership or an outright purchase. The second step of the search process, finding the value of your ideal business, is actually the longest and most difficult part of the investment process, since there are many ways to decipher what value a business is worth and what price to pay. Finding the value of your ideal business is a topic all to itself, and another article for the future.
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