Building a Framework: Week 12 - David Gardner's 25-Question Risk Framework to the Rescue!
Happy Sunday! It’s a great day to build a framework!
Today we'll cover the following:
The Importance of a Framework
My Framework Focus for Next Week
Highlights from the Framework Challenge
Three Podcasts Worth Checking Out
(Reading Time: 6 minutes)
For those new to the Mastering Your Money community, welcome! Here's a brief introduction. I started investing in 2020. After a couple of years of operating without a formal plan, I recognized my need for a framework. I've decided to share my journey in hopes of helping others who find themselves in a similar situation. Each week I share insights from successful investors I am studying. My goal is to create a community of like-minded investors who can learn from each other and offer encouragement. I'm glad you're here, and I'd love to know more about you. Please reply to this email and let me know where you are in your investing journey.
(Disclosure: This is for fun. I am not an investment professional, and nothing I say should be considered investment advice.)
The Importance of a Framework
It's a rainy Sunday in North Carolina, and I'm sipping on my third cup of coffee while contemplating the last year of my investing journey.
If this is a three-act play, we have officially entered act two. While the first act was full of investing follies, I have now seen the error of my ways and am on the path to redemption. This redemption process began as I moved from studying frameworks to applying them. And after only a couple of weeks of getting my hands dirty, I have seen the power of having a trusted framework.
This week a short report came out on B. Riley disparaging the company and sending the stock spiraling. It has since rebounded, but I’m not here to discuss the details of the short report. A few weeks ago, I ran RILY 0.00%↑ through David Gardner’s 25-question risk framework.
The stock scored a 12 out of 25, indicating it was too high on the risk scale for me, so I left RILY 0.00%↑ on my watchlist. When I saw the short report, I knew the framework had done its job.
Please don't hear what I'm not saying. I can't attest to the report's accuracy, but it confirms the riskiness of the investment. In years past, without a framework, I would have listened to a RILY 0.00%↑ earnings call, scrolled through the investor presentation, and clicked the buy button without a second thought.
But I’m a changed man, no longer susceptible to the forces of FOMO. Before clicking the buy button, I do my homework.
Running RILY 0.00%↑ through a framework showed me where to look, forced me to ask tough questions, and got me one step closer to building my framework.
My Framework Focus for Next Week
This is my 2nd week tackling the balance sheet questions from John Rotonti's Investing Checklist. It's safe to say that understanding the balance sheet is my largest area for improvement, but I got a better handle on the debt this week and posted my scores for questions 7-9 below.
I was feeling pretty good until I got to question 11. Here it is. 👇
What are the company's financial health ratios including net debt to free cash flow, interest coverage, debt to equity, debt to total capital, net cash to total assets, net cash to market cap, and goodwill (intangibles) to total assets?
I quickly realized that I was plugging in numbers without context or understanding their meaning. So, I've decided to tackle one ratio every day this week. My goal is to figure out the best site to find the information and calculate the ratios for comparable companies so I have more context.
I'll start with net debt to free cash flow on Monday and tackle more throughout the week. Feel free to join me in running businesses through these ratios or pick a framework of your own and see how they score. You can let me know on Twitter or in the comments below.
Highlights from the Framework Challenge
This week, Ryan joined the challenge and decided to run a company through David’s framework.
And check this out! A day later, Ryan built a tool to track the companies he scores. He plans to score them annually and see how the risk levels fluctuate from year-to-year.
Natalie did great work on GNRC 0.00%↑ this week. She's an all-star and is moving through John’s checklist quickly.
Three Podcasts Worth Checking Out
Calculating Risk Foolishly - I can’t say enough good things about David Gardner’s risk framework. In this podcast, David and two Motley Fool analysts run a couple of companies through the 25-question framework.
TIP522: Unconventional Wisdom From The Greatest Minds In Investing w/ Joseph Shaposhnik - I’ve shared some notes below. Shaposhnik has studied under some of the best in the business and shares a couple of frameworks in this podcast.
Lessons from Buffett’s Investing Framework - I've listened to this several times. John highlights his takeaways from Michael Mauboussin's recent talk with Todd Combs. He shares valuable insights into the mind of Buffett and what he prioritizes in his framework.
Are investors better off going against conventional wisdom? TCW portfolio manager Joseph Shaposhnik thinks so. During a recent conversation with @TreyLockerbie, Shaposhnik revealed 5 ways he goes against the crowd to find great stocks. 👇 podcasts.apple.com/us/podcast/we-…Have a great week!