Just as Santa makes a list and checks it twice prior to delivering presents to the kids around the world, before I make a purchase in the share market, I ask myself a few questions, a checklist if you will, to make sure that I am thinking logically about my purchase.
The questions I ask revolve around a few key themes.
Is it a great business?
Variations on this question are:
Is it easy to see what makes this business successful?
What is its competitive advantage?
Does it produce cash-flow similar to its reported profit?
Has it got little or no debt?
What could go wrong?
Is it trading at a fair price?
Variations could include:
Is it trading at a discount to my estimate of its value?
Does it have a sufficient margin of safety?
Is the value of this business growing over time?
Does it seem this business will continue to do well in the future?
How long will this performance continue?
Will it continue to grow its earnings?
Being able to answer these questions in writing to yourself can help you confirm that your initial decision was a sensible one and made based on fact. By having my answers in writing, it helps me refer back to my rationale for buying a particular stock at the time. This is particularly useful if the price of a stock falls, because rather than panic and sell at a loss, I create the opportunity to review my process and generally buy more of a good thing at a bigger discount to its value. Buying more shares in quality businesses at a cheaper price will increase the amount of profit in the long run.
Subscribe here to use this checklist on the valuations of the best quality businesses on the ASX.
This article is published by Dean Mico.
The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.