Building a Framework - Week 9: Margin of Safety, Cloning, Dealbreakers, and More
Happy Monday! It's a great day to build your investing framework!
Here are a few take aways from a week of building.
(Reading Time: 5 minutes)
Narrowing Down Your Investable Universe.
Something has come up repeatedly as I study interviews with my favorite investors.
The best stock pickers start with deal breakers.
Before they begin intense research, they eliminate the majority of businesses to consider for investment.
Dealbreakers are personal, developed through trial and error, and can be quantitative or qualitative.
It's similar to dating.
Before I met my wife, I went on several dates. After each one, I learned more about the traits I wanted in my future partner. Similarly, the longer you invest, the more quickly you can determine what you desire in an investment.
This means the first few questions in your framework are the most important since they determine what kind of pond you will be fishing in.
To find my dealbreakers, I need more practice. Some real-life reps will help me discover mine, so I will begin to run businesses through a few of my favorite frameworks.
This week I'll be looking at B. Riley ($RILY). It's a company that has been on my radar for a while, and I want to dig a little deeper. I'll run it through David Gardner's risk framework and let you know what I learn.
Unashamed Cloning
The more I learn about Mohnish Pabrai, the more impressed I am. His investing career speaks for itself, and he has succeeded by standing on the shoulders of Buffett and Munger.
Mohnish calls it cloning, and I highlighted several principles he cloned in the thread below. You might find a few worthy of cloning yourself.
Like Mohnish, I believe in studying the best of the best and tweaking their strategies to build my own.
Margin of Safety
Warren has become a weekly contributor to Mastering Your Money. This week he teaches us how to incorporate a margin of safety into our buying process. This is one of the biggest areas of growth for me. Sometimes I fall in love with a business and fail to consider the price I am paying.
Warren reminds us not to overpay and the importance of patience by explaining his process of buying The Washington Post. His $10 million investment turned into over $1 Billion. Waiting for a margin of safety allows you to limit the downside while increasing the upside significantly. That sounds good to me!
The best questions to ask before you buy
The Motley Fool hosted an Investor Round Table in November. Some of the world's best stock pickers discussed their investing processes, macro conditions, and favorite ideas for 2023.
Below, I captured some of the questions they use when researching a business. I think you'll find them helpful as you build your framework.
That’s a wrap!
Have a wonderful week!
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