Below is an overview of the framework that I use to research a stock. This post is intentionally brief and meant to be an easy-to-digest entry in a series about my Investment Philosophy and Processes (accessible via the Investment Philosophy Tab on the Home Page)
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The “4M’s” Framework
Meaning
The first step is to understand what the company does and how it makes money. Ideally, the business and the sector it operates in should be straightforward to understand. Furthermore, the company's Mission Statement should be clear and logical.
Moat
The term 'moat' gets thrown around a lot, but for me, it comes down to a few key questions: Does the company have any competitive advantages? What makes it stand out in its sector? Are there any significant barriers to entry, and is its business durable? Ideally, a company should have strong, positive answers to these questions.
Management
When it comes to management things I am looking for:
They are well aligned,
They have skin in the game
A good track record
Motivated
Founder is preferable but not necessary
Note, this is a dynamic situation and a previously ‘good” CEO can become a “bad” one over time. An example I can use from my own Investment Journey is that of Tesla. Elon Musk up to early 2021, especially in the 2015-2019 period, was a very motivational and engaged CEO who led the business to great achievements. Since Mid 2021 something clearly changed and the stock performance has reflected this. I exited at $420 in December 2024 as I totally lost confidence in the CEO after >5 years of holding this stock.
Margin of Safety- Plus Fundamentals and Valuations
Buffett has said that the three most important words in investing are 'Margin of Safety'. A simple definition of Margin of Safety is buying an asset at a price significantly below its intrinsic value to minimise risk.
The issue is that calculating Intrinsic Value is not an exact science. It depends entirely on the inputs you put into your model, which are, at best, educated guesses. Furthermore, you are trying to project into a highly uncertain future. Despite this, I will often run a simple DCF with conservative inputs to get a rough estimate.
For many investors Valuation is everything, but for me, it is just one part of the decision-making matrix. It matters to me more at the extremes than in the middle.
Taking a look at all 3 financial statements is a must for me: Income statement, Balance Sheet and Cash Flow Statement. The Income Statement shows profitability over a period, the Balance Sheet offers a snapshot of assets, liabilities, and equity at a specific point in time, and the Cash Flow Statement details the movement of cash from operating, investing, and financing activities.
Putting that together ideally I am looking for a company:
growing profitably or at least heading towards profitability,
with a strong balance sheet, ideally a net cash position
Cash flowing and ideally the FCF is not propped up by egregious SBC
With a valuation that is reasonable relative to it’s growth and the durability of said growth
Once, I have done this initial work I am in a position usually to know whether this company warrants further investigation and I can dig in even deeper or to stop here.
Technicals
Once I have done some initial Fundamental work (not limited to just the above for reference!) then I like to look at the Stock Chart. This is something which is a must for me and has dramatically impacted my P&L over the years since incorporating.
From a stock chart, I can glean how the stock has been trading, what the current trend is, and where potential areas of interest lie. I am not one to use numerous indicators, preferring instead to focus on price action, volume, RSI, key moving averages, and trend lines to identify key levels like support and resistance.
I look at stock charts of all holdings and watch list names daily so often I have built some familiarity with the holding already,
Deciding whether to Initiate a Position
When it comes to deciding whether to buy, it is not as simple as concluding, "This is a good company, so I will buy." Rather, I always compare a potential new holding against the ones I already own.
I am more likely to add it to the portfolio if it is a good company with a good technical set-up plus it offers me something different such as a higher beta position, maybe an uncorrelated bet in a different market or a special situation with a clear catalyst.
I am less likely to buy if it it’s a correlated bet or if I feel it’s an inferior position than what I may already own. Example is when I get pitched middling software stocks names, I always pass because why would I purchase those when I can keep holding GOOGL and AMZN?
When it comes to position sizing or how I categorise my holdings ensure to read this post below
Resources
Initial resources I use are:
Companies website
Filings and primary documents
Recent Earnings Calls
A research terminal such as Fiscal AI to access such information easier (Or Koyfin, Yahoo Finance Gold etc).
Charting tool
Thank you for reading, ensure to subscribe to the plan that suits and see you for the next post!
Beautiful. Thanks for sharing!