The most effective people ask the best questions.
These are the questions we ask of each investment we consider.
Business
We invest in businesses that serve human progress (not preferences)…
- What unchanging needs are served by the business?
- What is the value proposition? Is it 10x better than current alternatives?
- Do we like the company more the more we learn about it?
- What is the system of the business? How does $1 flow through the business?
- How does the business change with scale, including the value proposition and economics?
Environment
…riding macro-mega trends…
- What macro-mega trends most positively and most negatively affect the business?
- What adoption curve(s) is the business surfing? Is the wave crowded? Does the business deserve the wave?
Disruption
…with durable moats…
- Does the business benefit from chaos? Is it resilient? Does it have optionality?
- How will the business fail to surf its adoption curve and macro-mega trends?
- How quickly will the economics of the value proposition be disrupted?
- Should we compete with this business instead of buying it? How could we kill the business?
- Can the business endure a dry spell of capital raising with no dilution? How will the business go bankrupt?
Incentives
…powerful incentives…
- Can management have more success with shareholders vs. from shareholders? Is the time horizon of the firm’s management aligned with our own?
- Is management and the business provably skillful at capital allocation? Do senior leaders consider this their primary job?
- Do all leaders cultivate a culture of excellence? Do they obsess about serving customers?
- Is the business an evolutionary system that will learn, improve and evolve faster than its competition? Faster than the surrounding world? Will this improve its moat?
- Who is better off because the business exists? Who is worse off?
Valuation
…and high long-term intrinsic value…
- What is the range of outcomes, how predictable are they, and what is the probability of each? What is the intrinsic value of the business under each scenario?
- What business performance is already assumed in the price? What is the range of IRRs from this price point? (Hurdle: 25%. Every business should have the potential for non-linear returns.)
- How does this compare to base rates? Industry, peers, prospects, current market, 5-year averages, and other market seasons?
- If you never sold, how could you get your investment back out of the business?
Timing
…knowing that patience is our greatest competitive advantage, price only matters if you want to buy or sell, and the worst time to raise capital is when you need it.
- Why now — business?
- Why now — broader context?
- Are we likely to get another opportunity with less uncertainty or a better price? Is the market excessively greedy or fearful? Optimistic or pessimistic? Are rates / inflation / employment historically high, low, or neutral?
Judgment
We hedge our ignorance and emotions through cognitive leverage and imagining failure.
- Does the business have Great Company?
- Do we like, trust, and admire the management of the business?
- How confident (0-100%) are we in this analysis? How many years of thought and experience have we been able to bring to this analysis?
- Barring bankruptcy, how will we lose money on this investment?