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I just received my copy of SIPRO in the mail, and I'm looking forward to learning how to use it over the coming weeks.
Here's my shot at developing a list of DD questions to answer when either opening a small position or accumulating additional shares in a company. (For details about my personal investing strategy, see post #1302.) My objective is to apply the Pareto Principle to this list: I want to have a relatively short list of questions that can be answered in no more than an hour or two that provides at least 80% of what I need to know to make allocation decisions.
Special thanks to Myth, who inspired me to work on this! Here's the list:
Before opening a small position:
Understanding the Company
1. Do I clearly understand how the company makes money?
2. Do I clearly understand what key factors drive the business?
Understanding the Current Valuation
3. What is the company's current cash, debt, and profit margin situation?
4. What is my best estimate of the company's reasonable value per share? (Calculated via MaxPrice)
5. What is the worst case scenario? At what point does price = liquidation value?
6. Does the current price make sense? Is there a reasonable margin of safety at this price?
Understanding the Industry
7. How does this firm currently fit into the broader industry?
8. What is my best guess about how the industry will evolve over time?
9. What is the firm's competitive advantage? Is that advantage durable, and does it line up with how the industry is evolving?
10. How does the company's current cash, debt, and profit margin compare vs. competition?
11. Does the company's current management team appear to be experienced and competent?
12. Does management own the stock? Do they behave like manages or owners?
When analyzing a position I already hold for potential accumulation, particularly if the price tanks:
1. What caused the price to change?
2. Has the business fundamentally changed since my initial analysis?
3. Have the fundamentals of the business (cash, debt, margin) eroded significantly or unexpectedly?
4. Has management changed strategy or ownership behavior?
5. What is the prevailing market sentiment? Is it reasonable?
What's the new valuation?
6. Based on what I now know, what is my best estimate of current value?
7. Does the current price make sense? Is there a reasonable margin of safety at this price?
How should I allocate my capital?
8. Am I currently overweight in this company, with respect to my total portfolio?
9. Is there a better opportunity for capital allocation elsewhere?
10. How much should I allocate to this company, based on this new information?
Looking forward to your thoughts and feedback,
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