My Investment Checklist and Mental Model

August 30, 2024 / Vignesh / Human Behavior

As an investor, it’s crucial to approach every investment decision with a structured and analytical mindset. I have developed an investment checklist and mental model to ensure that I thoroughly assess potential opportunities and mitigate risks. This checklist is a detailed questionnaire, enabling me to evaluate businesses based on various essential criteria. By journaling these decisions and responses, I uncover potential deficiencies and regularly re-evaluate the investment at crucial intervals. This structured approach enhances my decision-making process and allows me to make well-informed and strategic investment decisions for the long term.

Business

  • Longevity
    • Question: Can the business continue in its current form and shape for another 50 years? If yes, why and how?
    • Response:
  • Market Size and Growth Rate
    • Question: What is the current market size and growth rate? (Growing pie and pie share rate)
    • Response:
  • Profit Pool
    • Question: What is the size of the industry’s profit pool and the business’s share of it?
    • Response:
  • Technological Influence
    • Question: How does technology influence the business and the sector?
    • Response:
  • Substitutes
    • Question: Is there a substitute for the business? If yes, what is it, and how does it compare?
    • Response:
  • Global Competition
    • Question: Is there global competition for the business? If yes, how intense is it?
    • Response:
  • Regulatory Impact
    • Question: How much do government policies and regulatory authorities impact the business and sector?
    • Response:
  • Market Disruption
    • Question: Can anyone with deep pockets disrupt the market? How?
    • Response:
  • Business Model
    • Question: Is it B2B, B2G, B2C (General Trade), or D2C (MT, eCommerce)?
    • Response:
  • Growth Potential
    • Question: Does the business grow at 100x revenue and PAT in 20 years or at 25% CAGR?
    • Response:
  • Supplier Influence
    • Question: How much influence do suppliers have on distribution in the business and sector?
    • Response:
  • Customer Loyalty
    • Question: How loyal are the customers to the business? What is the customer retention rate?
    • Response:
  • Competitive Advantage
    • Question: What is the business’s competitive advantage or moat? How sustainable is it?
    • Response:

Management

  • Type of Management
    • Question: Is it a family-run or professionally-run organization?
    • Response:
  • Ethical Behavior
    • Question: What are the management team’s ethical behaviors? Have any subtle nuances been observed historically?
    • Response:
  • Competency
    • Question: How competent is the management in the business?
    • Response:
  • Succession Plan
    • Question: What is the succession plan and the historical success rate of the succession?
    • Response:
  • Vision Alignment
    • Question: Is the business’s management vision aligned with my perspective of the sector? If not, why is there a divergence?
    • Response:
  • Management Track Record
    • Question: What is the management’s historical track record regarding performance and integrity?
    • Response:

Risk

  • Black Swan Events
    • Question: What black swan event can decimate the business and sector?
    • Response:
  • Assumptions
    • Question: What implicit assumptions have been made in this assessment?
    • Response:
  • Circle of Competence
    • Question: Do I have a sufficient circle of competence in the sector and understand the business? If yes, describe the sector and industry in my terms.
    • Response:
  • Operational Risks
    • Question: What are the significant operational risks the business faces? How are they mitigated?
    • Response:
  • Financial Health
    • Question: What is the financial health of the business? Consider debt levels, cash flow stability, and liquidity.
    • Response:

Valuation

  • Valuation Thumb Rule
    • Question: What is the thumb rule for business valuation (in today’s terms) based on business growth and current cash flow with a 10-15-year horizon?
    • Response:
  • Capital Requirements
    • Question: How much external capital is required to sustain and grow the business and sector?
    • Response:
  • ROE and ROCE
    • Question: What are the expected ROE and ROCE of the sector and business?
    • Response:
  • Comparison to Risk-Free (Fixed Deposit from SCB)
    • Question: How does this investment return compared to the Fixed Deposit return + Risk Premium?
    • Response:
  • Growth Potential
    • Question: Does the investment grow 100x in 20 years, i.e., at a 25% CAGR?
    • Response:
  • Valuation Sensitivity
    • Question: How sensitive is the valuation to changes in critical assumptions like growth rates, margins, and discount rates?
    • Response:
  • Downward Rerating
    • Question: Can a downward rerating of the business be possible? If yes, how?
    • Response:

Investment

  • Milestones
    • Question: What are the milestones to assess the above assumptions?
    • Response:
  • Allocation
    • Question: How much money is to be allocated at each milestone?
    • Response:
  • Exit Strategy
    • Question: What is the exit strategy if the investment thesis does not appear as expected?
    • Response:
← Back to home