Finding the best businesses just comes down to knowing what you’re looking for and then identifying the ones that meet most of if not all of your criteria. Here’s an entry level framework I use to try to determine if a business is worth investing in. Understand this is the first step, not the last, and to be sure they don't all carry equal weighting. But if you can come up with some compelling answers to these questions it can help get you on your way. Try taking one of your favorite current holdings and running it through. You're bound to learn something that will make you a better investor.
- Do you understand the business and how it makes money?
- Is there a large and/or growing market opportunity? What's its position in that market?
- Are there switching costs?
- Are there network effects?
- Are there any barriers to entry?
- Is there any pricing power?
- What is its competitive advantage?
- Is it growing revenue? Profitable? Cash flow positive? State of the balance sheet?
- Is there a short-term catalyst or long-term trend in play?
- Is management capable of leading this business? Do they own any of it?
- Is the price fair? Does it maximize the opportunity to beat the market over the next 3-5 years?
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