This article is excerpted from a letter by MOI Global instructor Michael Shearn, portfolio manager of Compound Money Fund, LP.
We are constantly refining our investment criteria, so we can more easily filter and process investment opportunities. Our criteria help us eliminate many ideas and prioritize the investment opportunities we should be spending our time researching.
One of the easiest traps to fall into when evaluating a potential investment is overweighting one criterion, such as a superior business model, while underweighting another such as the competence of the leadership team. For example, we may overlook the fact that the leadership team has not worked at the business for a long period of time (i.e., unproven leadership) because we become enamored with the high margins a business is earning (i.e., superior business model). To protect against this, we begin our analysis by searching for the weakest element in our criteria. For example, we will quickly pass on an investment if a business depends on a few customers for most of its revenues. Below we review a sample of the things we look for:
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