Thinking Like an Investor

I said in a previous post that I would try and write some more content in the future aimed at helping my younger self/newer analysts out. Bit of a quiet period before earnings start to pick up next month so here is something that I’ve created and use every time I research a new company from scratch. I’m someone who needs routine and structure, I get very easily distracted, so I’ve created a materials/research process checklist that I go through as I’m performing research to make sure that I do not miss anything and cover all the bases. I can talk about that specific process checklist in a different post, this post here is for an item on that checklist that I call the business quality scorecard. This is the very last item on my checklist before I write up a recommendation and post my notes to our internal research board. I’ve created a pdf version of this list of questions and I score each category 1-5. It then calculates a percentage score for the broader categories. The scores themselves and scoring the items is completely arbitrary and will have even less relevance before you get some experience and do a few different companies so that you have some reference points (it is impossible to get anywhere near a perfect score as such a business does not exist). The scoring is not why I’m posting this or what I want you to focus on. The purpose of posting this is to give you a framework for how to think like an investor and as more of a business owner than a trader. These are the questions that you should be addressing and asking yourself as you conduct your diligence. The reason I do this step last is to make sure I really thought about each different aspect of the business and the items that are relevant from an investment standpoint. The score itself does not matter as much as whether I gathered enough data points during my research to make an attempt at giving it a score. If I don’t have enough information to answer the questions on this list, I need to go back and do more work. Some of the questions have overlap and not every question will be relevant to every business, which is fine, the purpose again is to make sure I’m thinking like an investor about a name and covering the majority of the items. If it’s something that doesn’t really apply (maybe supply chain and they don’t have a true supply chain or something like that) I will just give it a 3. Again, the score isn’t really what is important as much as just going through the list and really thinking about each item and cross referencing it with the information that I’ve gathered in my notes. It takes some digging to answer some of the questions, and sometimes you won’t really have enough access to the company to answer them as a public markets investor, but I find it helpful to still include some of those difficult questions because it reminds me of where potential holes could exist in my thesis and where I’m at informational disadvantages. Hope you guys find it helpful, see below: (hopefully the formatting isn’t too off when I hit post)

Percentage Scores
____% Business Characteristics
____% Competitive Advantage and Industry Dynamics
____% Growth Opportunity
____% Risks
____% Management
____% Valuation and Recommendation

Score each question between 0-5

Business Characteristics
____1.) What products or services does the business provide?
____2.) How does the business monetize that product or service?
____3.) Through what channels does the business reach its customers?
____4.) How complicated is the business model both operationally and fundamentally?
____5.) Is the business focused on a specific niche or market-segment?
____6.) Would I personally become a partner in this business?
____7.) How is the business organized, and what are the reportable segments?
____8.) Do the business lines make sense together, or is the sum of the parts worth more than the whole?
____9.) Who is the business’s core customer? How does the business segment its customer base?
____10.) What pain point does the business alleviate for its customers?
____11.) Who are the business’s top suppliers, top customers, and top competitors?
____12.) How many suppliers/customers does the business have, and how much concentration is there within its top suppliers/customers?
____13.) What are the regulatory burdens for the business?
____14.) What is the typical time span that it takes for the business to complete a sale start to finish?
____15.) What is the useful life or life cycle of the business’s products or services?
____16.) Are there any contractual customer/supplier relationships, and what are the terms of the agreements?
____17.) How often are contractual relationships renegotiated?
____18.) What is the customer retention rate and cost of acquisition?
____19.) Do customers transact on credit? What are the typical terms for a credit transaction?
____20.) How many touch points are there between the business and its customers and what is the opportunity to deepen the relationship/add touch points?
____21.) Who are the key decision makers for the customers?
____22.) How volatile is customer demand and what drives demand volatility?
____23.) To what degree is the customer dependent on the products and services from the business?
____24.) How high is the cost of failure from the business’s products or services to the customer?
____25.) What is the frequency of purchase for the customer, and are purchases considered to be routine?
____26.) What degree of immediacy is there for the customer to acquire and consume the product or service?
____27.) Does the transaction constitute a meaningful percentage of the customer’s budget/spending?
____28.) What is the financial health of the business’s customers/suppliers?
____29.) What kind of lead time do suppliers need to fulfill a large order? How large of a deposit is customary on a large order?
____30.) How much additional capacity does the business currently have and how quickly can capacity be adjusted relative to demand fluctuations? What is being cut or expanded on when capacity is adjusted?
____31.) How are sales teams compensated? What incentives are in place?
____32.) Are the business’s prices transparent, and would more transparency impair pricing power?
____33.) Is there a formal training program for new employees, how long does it last, and what it cost to train a new employee?
____34.) Are the company’s employees highly sought after by competitors or other companies?
____35.) How desirable is the company’s brand on a resume? Do people dream about working there?
____36.) How vertically integrated is the business and is there opportunity for future or further vertical integration?
____37.) How capital intensive is it to scale the business further, and how much working capital does the business require?
____38.) How much of current capital spending and capital spending plans is maintenance-oriented vs growth-oriented?
____39.) How much operating leverage does the business have?
____40.) How does the business rank on ESG metrics?

Competitive Advantage and Industry Dynamics
____1.) Where does the business rank on the industry value chain spectrum?
____2.) Are returns to each link of the value chain equitable to the value created by each link?
____3.) How many layers are there between the business and the end consumer, and is each layer completely necessary?
____4.) How many competitors are there within the industry and how strong is the rivalry between competitors?
____5.) How rational is the industry on pricing? How rational is the industry on capacity?
____6.) Is there a threat of substitute products or services?
____7.) What is the pricing power of customers?
____8.) What is the pricing power of suppliers?
____9.) What is the pricing power of labor?
____10.) Does the business offer products or services that are difficult to copy or patent protected?
____11.) What are the remaining lives of existing patents, and were the patents generated internally or acquired?
____12.) Do the products or services of the business have real or perceived differences in quality for which customers are willing to pay a premium for?
____13.) Is the emphasis on quality due to customer tastes and preference or due to a high cost of failure?
____14.) Does the business have brands that have signaling effects, an attached perception of quality, or are integrated into the customer’s self-identity?
____15.) How high are customer search costs?
____16.) How high are customer switching costs?
____17.) Does the business have unique production technology, superior distribution, or unique access to resources/locations that are difficult to replicate?
____18.) Does the business benefit from efficient scale or size for the relevant market?
____19.) Does the business have products or processes that are scalable at attractive marginal costs?
____20.) Is scale achieved at a local/regional level or a national/global level?
____21.) Is the business protected by a steep learning curve?
____22.) Does the business benefit from network effects?
____23.) Does the business benefit from difficult-to-obtain regulatory approvals or licenses?
____24.) Does the business benefit from heavy upfront capital requirements to enter the industry?
____25.) How difficult would it be to replicate the entire business if capital was not an issue?
____26.) Is the industry directly exposed to fiscal or monetary policy?
____27.) How cyclical is the industry itself?
____28.) How exposed is the industry to the broader business cycle?
____29.) Does the industry as a whole have the ability to pass input costs through to customers?
____30.) Does the business have an industry leading vision or does it follow/respond to competitors?
____31.) Has the upper bound of pricing ever been tested by the industry? How close to the upper bound is pricing likely to be currently?
____32.) Does the business compete with a meaningfully differentiated product/service, or is it a better-mousetrap model?

Growth Opportunity
_____1.) What is the total addressable market for each of the company’s businesses or segments, and how fast is each TAM growing?
_____2.) What is the aggregate total addressable market and growth of all the businesses or segments?
_____3.) How does management project forward growth and what is that growth primarily comprised of (price, volume, market share gains, new products, M&A)?
_____4.) How strong is the potential M&A pipeline?
_____5.) How different are the growth rates at different parts of the business and how will the growth differentials affect margins over time (most profitable growing fastest/slowest)?
_____6.) Has past growth been achieved through internally generated projects and R&D or was it primarily acquired?
_____7.) Can relationships with existing customers be deepened in order to generate additional growth?
_____8.) How likely is the company’s growth strategy to attract competitive retaliations?
_____9.) Are recent share gains sustainable or have they been the result of being first to replicable innovation?
_____10.) Where is industry growth on the S curve?
_____11.) How strong were past growth trends? How likely are past growth trends to repeat or be sustainable?

_____1.) How much company-specific uncertainty is there (financial, competitive, management, operational)?
_____2.) How much industry-specific uncertainty is there (cyclical, regulatory, competitive landscape)?
_____3.) How much country-specific uncertainty is there (political, FX, economic)?
_____4.) How much market-specific uncertainty is there (sentiment, rates, correlations)?
_____5.) Is there any pending litigation or material liability from past litigation?
_____6.) Are there any on-going activist shareholder campaigns?
_____7.) Has there been a change in auditors or a large change in auditor pay that is not equitable to the change in the business?
_____8.) Are industry participants adding capacity?
_____9.) Is there risk from deregulation or new regulation?
_____10.) Is product obsolescence a risk? Are product upgrade cycles a risk?
_____11.) Is there a risk from a patent expiration?
_____12.) Is there risk from a recent acquisition or divestiture?
_____13.) Does technological advancement represent a challenge or an opportunity for the business?
_____14.) Is there risk of competitive disruption to the business model?
_____15.) Is there risk from geographic exposures (political, economic)?
_____16.) Is there risk from natural disasters or weather? Is the business seasonal?
_____17.) Is there risk from a recent key management change?
_____18.) Is there risk from the refinancing of a large maturity?
_____19.) Does the business have additional borrowing capacity?
_____20.) Does the business have adequate ability to service its current debt?
_____21.) Does the business have a valid explanation for carrying or adding debt?
_____22.) Is the business exposed to FX, interest rate, or commodity volatility?

_____1.) Does management manipulate earnings or purposely impair transparency?
_____2.) Are one-time costs truly one-time, or are they recurring and serve to manage adjusted earnings metrics?
_____3.) Where does management fall on the owner-operator to hired-outsider spectrum?
_____4.) Does management truly have a long-term vision or are they more concerned over short-term results?
_____5.) Is incentive compensation structured to encourage long-term thinking and a focus on real value creation?
_____6.) Does incentive compensation have appropriately high, or adequately high, hurdles for payout?
_____7.) How well is management compensated relative to peers and relative to the size of the business?
_____8.) Is the peer group chosen for benchmarking appropriate?
_____9.) How well is management compensated relative to the rest of the organization?
_____10.) Is there a high percentage of insider and director ownership? Is the vesting period long enough to force long-term thinking and planning?
_____11.) What is management’s track record in previous roles or at previous companies?
_____12.) Has management purchased or sold personal shares on the open market for reasons not related to tax planning or derivative conversion?
_____13.) Is the management of the business’s segments centralized or decentralized?
_____14.) Does management have a good track record relating to M&A? Have they paid/sold at fair prices and have they bought and sold at the right times?
_____15.) Does management preserve the brand equity of their targets or do they roll-up targets completely?
_____16.) Has M&A been focused on the company’s niche or core competency? Does management engage in thematic M&A that adds value to the other existing parts of business?
_____17.) Does management prefer larger-fewer, or smaller-more-frequent deals?
_____18.) Does the company have a good reputation as a buyer?
_____19.) Does management approach divestitures with the same discipline as acquisitions? Does the frequency of divestitures match the frequency of acquisitions?
_____20.) Does management determine a fair value (and how do they determine fair value) for stock repurchases, or are buybacks programmatic?
_____21.) Are dividends part of a total return strategy or evidence of a lack of attractive growth investments and acquisition targets?
_____22.) Does management’s commitment to maintaining the current dividend constrain capital allocation?
_____23.) How well does management seem to know the business and industry?
_____24.) Does management have prior industry experience? Do they have experience with the company’s specific customer base?
_____25.) Does management keep its composure when confronted with a difficult question or analyst?
_____26.) Do we actually learn anything new about the business when management speaks or is it a canned IR-type narrative?
_____27.) Is management focused on profitable growth or scale?
_____28.) Does management provide more detailed or more high-level guidance? Is management’s guidance typically conservative or aggressive?

Valuation and Recommendation
_____1.) Is there decisively negative or positive sentiment around the business?
_____2.) Is the probability of the bull (bear) thesis greater than the probability of the bear (bull) thesis?
_____3.) Is management’s guidance based on rational expectations or an extrapolation of past trends?
_____4.) Are consensus estimates based on rational expectations or an extrapolation of past trends?
_____5.) Are consensus estimates unanimous or are there dissenting opinions?
_____6.) Has all available information been fully disseminated or do I believe that I have an informational advantage?
_____7.) Are there a sufficient number of investors processing and incorporating the information into the price?
_____8.) Do I believe the consensus or current market price to be made up of a diverse and independent set of opinions?
_____9.) Do investors have adequate incentive to give estimates that they truly believe are accurate, and do they have enough incentive to express a dissenting opinion?
_____10.) Do I perceive this business to be inefficiently priced?
_____11.) Do I have a truly differentiated view from the consensus or the view implied by the current market price?
_____12.) Does my differentiated view result in a meaningful and tangible difference between my estimates of the magnitude, duration, timing, or growth of cash flows from consensus estimates or the estimates implied by the current market price?
_____13.) What degree of confidence do I have in my variant perspective? Can I accurately identify what is the market missing, and why is it missing it?
_____14.) How and when will the market realize my estimates of true intrinsic value? How confident am I in the timing and presence of this catalyst?
_____15.) Is my argument relevant, credible, accurate, adequate, and supported by hard facts?
_____16.) Why does the evidence I’ve highlighted support my argument?
_____17.) Have I fully acknowledged the limitations of my argument and data points?
_____18.) Have I fully addressed the other side of the trade and possible counter arguments?


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Fingers crossed that one of those helps you.

I'm an AI bot trained on the most helpful WSO content across 17+ years.

Acquisitive companies are tough for sure because if you're screening based on an absolute level of ROIC and they recently made an acquisition they will screen poor, but that doesn't mean that the acquisition won't generate real economic value over time as synergies are realized. So I agree that incremental returns are incredibly important and difficult to evaluate for the serial acquirer.


This is interesting, and very different from our quant macro view of the world. We do a lot of factor tilting, geo, sector and asset class bets but none of this. If you don't mind me asking, what kind of shop do you work for?

The only difference between Asset Management and Investment Research is assets. I generally see somebody I know on TV on Bloomberg/CNBC etc. once or twice a week. This sounds cool, until I remind myself that I see somebody I know on ESPN five days a week.

Mid-Large sized Insurer, we run all US equities in-house. We use a factor model (value/quality) as somewhat of a screen that ranks/frames all the stocks in our universe, and we can take a position in something if it scores highly in our model without a ton of additional work on it, but we're primarily doing fundamental work on the individual names we hold. Especially for the positions we put greater active weights on.

Mid-Large sized Insurer, we run all US equities in-house. We use a factor model (value/quality) as somewhat of a screen that ranks/frames all the stocks in our universe, and we can take a position in something if it scores highly in our model without a ton of additional work on it, but we're primarily doing fundamental work on the individual names we hold. Especially for the positions we put greater active weights on.

Are you investing the general fund? Also, if you mind my prying, In broad terms, what's the size of the US Equity sleeve of the account?

We're a pure AM firm, and while I think other funds/departments may be more similar to what you do, we're very different. We've got oodles of research from asset managers like AQR and RA and index providers like MSCI, FTSE, and S&P about equity factor performance, and tilt based on our own overlay. It is rather nice when you're big enough that the index providers give this as an offering of peace.

The only difference between Asset Management and Investment Research is assets. I generally see somebody I know on TV on Bloomberg/CNBC etc. once or twice a week. This sounds cool, until I remind myself that I see somebody I know on ESPN five days a week.

This is very helpful. I perform similar diligence for my investments, though this checklist seems a bit more extensive.

I sometimes struggle with filtering investment ideas before going through this comprehensive diligence. Perhaps someone could shed some light on this. What's your preferred method for filtering and choosing investment ideas?


As I mentioned in a different response, we use a factor based (value/quality) overlay that scores every stock in our universe. That is generally our starting point, but for me personally, I always start with/filter by ROIC. This can have the unintended result of missing out on some companies that might have a strong position but are reinvesting back into the business above the EBIT line, but all else equal I feel like ROIC is the best starting point when looking for evidence of a competitive advantage (which is what I put the most weight on).

Also will come across names when breaking down value chains. Might be working on a name and then find out that one of their suppliers has fat margins. That is usually always worth following up on and learning more.


This is awesome, thanks for sharing it! Have you shared the framework for researching companies from scratch?

Need some assistance: just interviewed with Goldman and JPM for their Analyst programs.

I put in a lot of time researching, at least I thought.

I’d appreciate a more detailed approach on how to tackle the rest of the companies in shooting toward.


Most Helpful

I haven't done a full post on my process but I am a fan of using a checklist as I work through a name. I'll do a full post at some point but here is something you can work through: 1.) 10-K cover to cover, focus on the actual business and don't get lost in the most recent numbers, but take notes on everything. 2.) Proxy cover to cover, management history, top holders, most important though is what performance they are comped on. What are the hurdles and what kind of behavior/thinking do the hurdles encourage? Note any activist involvement or vote items that are irregular. 3.) Investor day or sell side conference presentations and transcripts. These are telling, shows you what they think are their strengths and the go forward opportunity. 4.) Earnings transcripts and presentations. I usually like to cover at least two Q4's worth of these at a minimum. You will pick up recent performance trends and what sell side focuses on by their questioning. Also will see how management responds to a difficult question and how they address blemishes in the quarters. 5.) Recent 8-Ks, I like to quickly scan through about 2 years of 8k's. Usually you don't find much but other times you'll see important amendments or changes in management that you might not otherwise pick up on. 6.) Sell side research, buzz through as many of the most recent pieces as you can from a couple different providers. You'll already have an idea of what they care about from the earnings transcripts, but you'll get the full picture here. Something that might surprise people here, Morningstar is actually IMO the best sell side out there. Most of you will have access to their stuff through your PA brokers, it isn't your typical quarterly rehash sell side work and I think it's always worth reading through their stuff. Traditional sell side we have relationships with most of the larger brokers but it's really all the same most of the time. 7.) Work through the list in this post. Again, the takeaway here is from 1-6 do you have enough to answer each of these questions/items? This is where you will start formulating your questions for management or sell side analysts. 8.) Start making calls, management, sell side, and start thinking outside the box...maybe you know an employee of your target or know someone through a friend of a friend. Maybe you know someone at one of their customers or suppliers? Find people on linkedin...Just start making calls and answering the questions you've formulated. 9.) Valuation. I never start with valuation, I always want to b interested in the business first and foremost, Igaf what the multiple is or implies when I start out. By starting with the business first and performing the work, you'll know how to respond when/if volatility hits and you'll know if it signals risk or opportunity. I personally always build out a DCF and that will be my primary guide on valuation. Using a historical multiple or comp multiples doesn't make much sense to me anymore as my process has evolved. 10.) Put together your pitch. Tons of ways to structure this, but this is how I do it. Start off with a quick elevator pitch, 2-3 seconds detailing the opportunity. In the actual body I have several standard headers that I fill out going back through my notes: Company overview, Industry Characteristics, Competitive Advantage, Capital Allocation and Management, Valuation and Catalysts, Recommendation, and then I attach a financials tear sheet at the end.

Should be enough here to improve your pitches for your next one.


Nice framework. I'd add that an argument I have for why valuation should come last is because valuation should effectively be telling the story of your analysis a.k.a putting a cohesive thread through all of the individual data points you gathered from evaluating the above materials. Every input into your DCF model should be tied to your overarching story using evidence from historical performance, competitive analysis, regression to the mean and extrapolation from any additional intuition / personal input you have on the matter (variant view). The pitch and the valuation (both intrinsic and relative) should flow together as one unit in a convincing and cohesive manner.

This is awesome, thanks for sharing it protonmail! Have you shared the framework for researching companies from scratch?

Need some assistanc usa todaye: just interviewed with Goldman and JPM for their Analyst programs. That is generally our starting point, but for me personally, I always start with/filter by ROIC I put in a lot of time researching, at least I thought.

I’d appreciate a more detailed approach on how to tackle the rest of the companies in shooting toward.



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