How do you become a great at judging businesses?
I’ve been trying to think about the framework for really being able to understand what a good business is. There’s the obvious: defensibility of position; long term earnings quality/power; cash flow, stage dependent. But what else am I missing. Really I’d love to hear how you investment professionals break down or think about a business, from a long position (doesn’t just have to be able to handle Leverage at 4.5x EBITDA. Appreciate all commenters
To become great at judging businesses, you need a comprehensive framework that goes beyond the obvious metrics like defensibility, earnings quality, and cash flow. Based on the most helpful WSO content, here are some key elements and approaches to consider:
1. Competitive Differentiation
2. Industry Dynamics
3. Cash Flow and Financial Health
4. Management and Governance
5. Forensic Analysis
6. Catalysts and Risks
7. Long-Term Perspective
8. Qualitative Insights
By combining these elements into a structured framework, you can develop a more nuanced understanding of what makes a business truly great. Remember, the best investors don’t just analyze financials—they think critically about the business’s position, potential, and risks over the long term.
Sources: Long term, concentrated, deep fundamental investing, Q&A: Credit hedge fund analyst at MF, former BB trader, What makes a good short?, https://www.wallstreetoasis.com/forum/private-equity/then-and-now-compbanker?customgpt=1, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1
Simplest answer is reps. You know how it takes 100 hours to get good at anything? Same applies here. Start with learning the broad investor mindset / framework, then just keep doing case studies or live exercises to get your 100H in. If you have enough brainpower, you’ll start to develop the right pattern recognition to get more and more efficient.
Lot easier to do if you’re focused in a specific strategy, but always helps to look as broadly as possible as industries and asset classes are intertwined at the end of the day.
Last thing is to leverage your peers and your seniors as much as possible. Constantly try to imitate them, interpret their decision making, then apply it your own. Then ask questions constantly to better ascertain the right takeaways
In terms of more specific criteria - you should be able to find this easily on your own online
You need pattern recognition and as they mentioned above you get that with reps. You also need to look back at every transaction you do and extract the key learnings from it.
Pessimists look smart, optimists make money.
You’re missing the reason to hit the buy button. “Business has a moat” isn’t a good enough reason to invest and any monkey can come to that conclusion.
Regarding the generic points I made, I was purely referencing the broad market standards across PE so they wouldn't be mentioned in the comments.
And whilst I agree with what you’ve said, I feel you haven't actually provided anything constructive with regard to being able to become a good judge of any business.
So i’ll ask:
1) What are the first things you’re looking for when the CIM & model land on your desk?
2) How do you then begin to assess the company as an individual entity against its competitors within a market.
It's easy to tell what a good business looks like- high margins, long runway for growth, strong competitive position with few alternatives and good reasons that position will be defensible. The hard part is knowing what qualities in businesses you're willing to give up/fix up and what you need to get paid for.
Agree it comes with reps / basically pattern recognition. I think learning to see what makes a good business in the present tense is fairly easy. Harder to judge what makes a good business 5-10 years from now and even harder knowing how to invest in a way to make money off of that (ie the interplay between valuation / outlook / “good business”). I think people vastly underestimate the % of the PE market that is investing in shitcos with extremely volatile, random results.
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