5 steps to avoid stupid mistakes before buying in the markets
Last Minute Buying Analysis
"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."
Warren Buffett
Being smart might be a handicap when you start to invest in the stock market. You’re looking for brilliant ideas. You might develop incredibly detailed Excel models for your valuation work. And after a certain time, you figure it mostly boils down to 3 things:
Control your emotions
Avoid making stupid mistakes
Stay in the markets as long as possible
In this week’s email:
TOP 3 articles I read this week
The last minute buying analysis template (LMBA)
TOP 3 articles I read this week
The stages of life cycle analysis by Michael Mauboussin: I’ve been using the lifecycle of companies in my investing analysis for a long time, but Michael has linked quantitative data to the different stages. “The highest total shareholder return are for those companies that end up in the growth stage”.
It’s not 1 article, but a series on incremental return on invested capital by John Huber. You want to understand ROIIC, you read it.
You want to see how you can use AI in your research, this article gives a great overview by Asian Century Stocks
The Last Minute Buying Analysis (LMBA)
In most industries and factories, when a worker has to perform maintenance on an equipment, they do something that is called a Last Minute Risk Analysis.
Even if it took hours and hours to prepare the work, even after everything has been documented in a 100 page work package, before actually starting the activity, they check if there are any final risks in the field.
It makes sense.
All that work you did might go to waste if you didn’t identify that last change right before you started to take action.
It’s the same in investing.
"Investing is not about making brilliant moves, but about avoiding stupid mistakes."
Charlie Munger
So my goal is simple.
I want to make a Last Minute Buying Analysis template you use each time right before you buy a company for your portfolio.
I’ve set the following constraints:
It has to fit on a single page
It cannot be more than 5 questions
In other words, when you’re filling out the template it shouldn’t take you more than 5 or 10 minutes.
Here’s the 5 steps I’ve come up with. Please comment on this article to improve the LMBA!
But first the premise:
“You understand the business model of the company and can explain it to a 10-year old. You’ve looked at the industry. You know the company better than most investors. Fill out this LMBA before making your final decision. Your answers have to fit on 1 single page. The LMBA only has 5 questions.”
In other words, you did the work. You’re ready. It’s time to do your final check.
Question 1: The Why
Why do you want to own this company?
This is your short pitch for the company. You should be able to write down in a couple of sentences why you love this company and the investment case. What makes it SPECIAL?Question 2: The Market
Why do you think the market is giving you this opportunity?
When you buy a stock, someone on the other side of the trade is selling. You think you see something the market is missing. What is it? How is the market looking at this company?Question 3: The Opportunity Cost
Why do you want to own this company versus other companies out there or versus what you already own?
There are 100,000 public companies in the world. Why this company and not another? Do you think it’s better than what you already own? Make sure it passes your hurdle rate. What's the margin of safety?Question 4: The Volatility Check
If you buy the stock tomorrow, and the price drops 30%, what will you do?
The goal is to see how you’ll handle volatility. Enduring volatility is the price investors pay for great returns.Question 5: The Sanity Check
How do you feel right now?
This question is often neglected. But it's the most important of them all. If you’re tired, stressed or feel unstable, it is best to sleep over your decision and get back to it the next day. Do you feel an eagerness? Is there FOMO? It’s better to step away from the decision for a certain time. Before buying, you should be calm, rational, well rested. Avoid eagerness when buying in the markets.You can download the WORD file below and use it yourself.
All investor should have some sort of a process. Checklists are great when selecting companies. But I think the most important checklist is this one, right before you buy.
Note: I’ll draft a LMSA (Last Minute Selling Analysis) in the future. Now that I think of it, if you’re hunting for 100-baggers, that one is even more important!
May the markets be with you, always!
Kevin
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Great quote…love the guy