We are the fan of arguably best investors of public markets globally, Warren Buffett and his partner Charlie Munger. We practice value investing and derive our stock-picking philosophy from these legends. Warren Buffett in his 2006 Annual Letter to Shareholders lists his four investment criteria and we tend to use that along with one of our own. In general, we use a five-step process to analyze stocks discussed in detail below:

• Understanding the Business and its Moat: We try to understand the economics of the business we analyze. We incorporate second-order thinking to understand intricacies which are bound to miss out by the masses. For any business analyzed, we try to get a good view of its competitive advantage or moat as Buffett and Munger calls it. We try to get an idea of what separates them from competition, how will they stand out when there are crises industry wide and similar other factors.

• Business Growth and Runway: To the best of our understanding, we try to get a realistic view of how the business is expected to perform in future. We don’t optimize for next quarter or next year, we usually target a long-term period of five years or so. We try to get a good grip of the market business operates in, the problem it’s solving and how long will the business keep going.

• Management Tenets and Trustworthiness: Executives running the business can accelerate as well as decelerate the growth of any business and so we keep a close eye on  what the management is doing. We do not engage with the management directly, we analyze them through their public appearances such as quarterly earnings call, do they walk the talk, what do their annual reports say etc. We look for a management that’s honest, has the fire to outperform competition and is realistic rather than plainly optimistic.

• Valuation: Most of the times, the difference between a great investment and a poor one is valuation. There are multiple methods to value a business and depending on the industry, business economics and growth prospects, we value the business. We make sure we have significant margin of safety for all our investments.

• Portfolio Sizing: After analyzing the business, how it fits in the portfolio is a critical thing. We don’t look for diversifying portfolio or consciously concentrating it. Portfolio sizing, we believe is more of an art than a science. We try to position ourselves in a way that short-term volatility, if we expect it, can be used to our advantage. Another critical factor we use for portfolio sizing is to compare new opportunity it to our existing holdings and proceed accordingly.