The Four Questions We Ask Before Buying Any Business

There is a comforting myth that good investing is a matter of better spreadsheets. Build a finer model, the thinking goes, and the answer falls out. It rarely does. The hardest part of research isn't the arithmetic — it's deciding what is worth modelling in the first place.

So before we open a spreadsheet, we ask four questions. If a business can't survive them, no discounted cash flow is going to save it.

1. Do I actually understand how this business makes money?

Not in the brochure sense — in the unit sense. What does the company sell, to whom, how often, and what does it cost to deliver one more unit? If you can't explain the path from "customer" to "cash in the bank" in two sentences, you don't understand it yet.

This question quietly disqualifies most of the market for most investors, and that's the point. The goal isn't to understand every business. It's to be honest about the few you do.

"Risk comes from not knowing what you're doing." The cheapest risk control is admitting the edges of your circle of competence.

2. Why does this business earn good returns — and will it keep earning them?

A company earning high returns on capital is, by definition, attracting competition. So the real question is what stops the competition from copying it. A brand customers trust. Switching costs that make leaving painful. A cost advantage rivals can't match. A network that gets more useful as it grows.

If you can't name the moat, assume there isn't one. High returns without a moat are not a feature — they're a countdown.

3. Can I trust the people running it?

You are handing capital to management and, often, to a promoter family. Two things matter: are they competent at allocating capital, and are they honest with minority shareholders?

Look at what they do with profits, not what they say at conferences. Do they reinvest at high returns, or empire-build into low-return adventures? Do related-party transactions quietly siphon value? Has the dividend and the disclosure been consistent through a downturn? Management quality is invisible on a single year's numbers and obvious across ten.

4. What is the market already pricing in?

Only now does valuation enter. And the right frame isn't "is this cheap?" but "what would have to be true to justify today's price?" Reverse the DCF: solve for the growth and margins baked into the current quote, then ask whether those assumptions are conservative, plausible, or heroic.

A wonderful business at a heroic price is a mediocre investment. A good business at a fearful price is often the better trade. Price is what protects you when you're wrong — and you will, sometimes, be wrong.

The discipline of saying no

Most ideas fail at question one or two, and that is a feature of the process, not a bug. The investor's edge is rarely a clever insight; it's the patience to pass on the ninety-nine and the conviction to act on the one.

We'll spend the coming weeks putting individual businesses through exactly these four questions. None of it is advice — it's a way of thinking, shown with the reasoning visible. That's the whole point of this letter.