In August 2017, I knew my investing philosophy, but struggled to communicate it concisely. So I took a sheet of yellow legal paper and sketched out three circles in a Venn diagram and wrote “management,” “moat,” and “price” in one of the circles.
From there, I asked myself, “What do I mean by each of those things?” And I expanded on those concepts in the margins around the circles.
I also found the points in the diagram where two circles were joined, but not all three. Those I labeled “traps” to be avoided. For example, if price and moat overlapped, but not management, that could mean poor capital allocation by management might lead to moat erosion. In turn, that would drag down returns on invested capital over time, and lead to poor returns.
Since revisiting the diagram (latest version above), I added a few points in the margins, but the core remains the same.
It’s important to note that no company on earth checks off all of the characteristics I list in the margins. That said, I expect any company I invest in to check off at least some in each box.
After taking my legal pad sketch and putting it into a Google drawing program, I posted it on Twitter, and it made its rounds on FinTwit. Shortly after publishing, I wrote a post about the process and how to address the traps in the diagram, which you can find here.
I’ll reference this philosophy diagram in future posts, so I wanted everyone at Flyover Stocks to have this page to refer back to for clarification.
Stay patient, stay focused.
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