25/12/2023
Stock selection framework
Use this framework to find great stocks
1️⃣ Universe of ideas
These are your general investment ideas.
Keep your eyes and ears open. Good ideas can come from anywhere.
Use these screening criteria:
- Sales & Profit growth > 10%
- Debt / Equity < 1x
- Return On Equity > 20%
- P/E < 25x
2️⃣ Circle of competence
Is the business simple? Do I understand how the company makes money?
Criteria:
- Know your limits and stay within them
- The size of your circle does not matter, knowing your boundaries does
3️⃣ Financial stability filter
How has the company grown in the past? How clean is the balance sheet? Does the company have a positive cash flow?
Criteria:
- Look for stability and consistency
- Cash flow is more important than earnings
4️⃣ Wide moat filter
Is the company better than its competitors? Only invest in companies with a sustainable competitive advantage
Criteria:
- High and sustainable gross margin (> 40%)
- High and sustainable ROIC (> 15%)
5️⃣ Price filter
Is the valuation of the company reasonable? The larger your margin of safety, the better.
Criteria:
- Buy wonderful companies at a fair price
- Focus on the intrinsic value per share growth