Quick Analysis
The MVP philosophy applied to financial analysis
I am closely linked to the IT sector and, for more than a decade, there has been a new philosophy in the development world called MVP (Minimum Viable Product).
The main idea behind this concept is to dedicate the least amount of effort and resources possible to validate a product. Instead of managing the project in a traditional way, creating the complete product, a basic version is launched that allows collecting real user feedback and checking if the product or service is really interesting for the end user.
Application to market analysis
This philosophy can be applied not only to application development, business, or personal life, but also to market analysis. The idea is simple: always spend the least time possible to detect if a company meets our expectations (strategy) and deserves that we invest more time in analyzing it.
The ROIBD concept
In the world of finance, there is a similar concept, ROIBD (Return On Invested Brain Damage), introduced by Bill Ackman. This concept holds that the more effort we dedicate to analyzing a company, the greater benefits we should expect to obtain.
Key questions
In addition to MVP or ROIBD, I recommend that you keep the following questions in mind:
- Question 1 - Is the company I’m interested in within my circle of competence?
- Question 2 - Why shouldn’t I invest in it?
Question 1: Circle of competence
What do we mean by circle of competence? Whether we understand how the business works and how it generates profits. A bakery, a workshop, or a multinational biotechnology company are not the same thing.
If we don’t understand how it generates profits (that is, if it’s outside our circle of competence), we shouldn’t analyze it, but rather spend time understanding the sector and how profits are generated in it. If, after studying it, we still don’t understand it, it’s probably a bad long-term investment and we should dedicate our time to other sectors.
In the stock market, unlike in life, there’s nothing wrong with missing an opportunity; there will always be more. Patience, take the time you need to understand the business.
Question 2: Why shouldn’t I invest in it?
Many investors, and I include myself, tend to get excited about a business and want to add it to our portfolio. That passion can be as strong as blind love, which often prevents us from seeing the negative aspects, and that could cause problems.
Always keeping this question in mind will allow us to keep a cool head and avoid unnecessary disappointments.
Support tool: Notebook LM
A reminder for everyone, Notebook LM is a tool that can answer questions based on the files you share with it. Its knowledge depends on the available information, so the more files and data we have, the better.
Keep in mind that it won’t be able to provide a valid answer if the information is not in the shared files.
Want to review the tool?
Visit the following page:
Quick filter for investment ideas
The important thing is to identify if the company presents red lines that we are not willing to cross, before performing accounting analysis or conducting a thorough study of the company.
The following points are generic and each investor or fundamental analyst should adapt them to their own style:
- What market does it trade on?
- Is there any known fraud case in which the management team is involved?
- Is the company part of my circle of competence?
- Quick accounting valuation
What to do if we detect red lines?
If during the first filter or quick analysis we detect something strange, our reaction will depend on the type of problem. For example, the company owner having conflicts with the tax authority (in Spain) does not necessarily mean we should discard it. However, if there are clear signs of fraud against investors, we are facing an obvious red line, and the most sensible thing is to stop the analysis immediately.
On the other hand, if the problem does not directly affect your investment, the most prudent thing is to continue with caution. These would be “gray areas”: aspects that require more careful evaluation.
Also, if when reviewing how the company generates profits (Point 3) you can’t understand it, it’s best to stop and investigate both the company and its sector before moving forward. Deep understanding is key to making informed decisions.
Practical cases
That said, let’s look at the quick analysis of two companies: