What to look for before you commit to an investment? What kind of checklist should you go through?
The following is what Warren Buffett answered to similar questions.
The investment checklist is the checklist to look at a business:
- We look at whether we can understand the business. That means they sell a product that we think we understand or we understand the nature of the competition, what could go wrong with it overtime.
- Once we find that business that we understand, we try to figure out whether the economics of it means the earning power over the next five or 10 or 15 years is likely to be good and getting better or poor and getting worse.
- Then we try to decide whether we are getting in with some people that we feel comfortable being in with.
- Then we try to decide what an appropriate price for what we’ve seen up to that point is.
The checklist that goes through our mind is simple, not complicated. Knowing what you don’t know is important and sometimes that’s not easy. Knowing the future is impossible in many cases, difficult in others, and sometimes relatively easy. We are looking for the ones that are easy. If you think of buying a service station or a dry cleaning service to invest your life savings in, you’d think about the same sort of things.
About me and why this series:
I got a life-changing experience studying Warren Buffett’s annual letters in 2013 after 10 years of speculating, market timing, charting, and forecasting. I started investing in the Vietnamese stock market in 2015 with what I saved from my engineering job. In 2018, I decided to study Warren Buffett’s investing again by going through all of available Berkshire Hathaway’s annual meeting videos. It has been another life-changing experience. Warren Buffett’s teaching is a real germ and yet not many people replicate. Hence, I am committed to share what I learned.
You can subscribe to my blog to follow the series of what Warren Buffett has been teaching in his annual meetings. I attempted to modify but keep as much as possible what he spoke.