For near a decade, I worked as a professional investor at a now $86 billion asset management firm, looking at thousands of companies around the world.
Here is a surprising truth I learned from my time there:
As complicated as businesses can be, there are only so many questions you need to ask to understand the basic mechanics of a company. Moreover, not only is it possible to synthesize the “gist” of a company, with some practice, it’s possible to do this in minutes.
How? Many reps, and by asking good questions.
Here are nine questions that can help you understand most of what you need to know about a company:
1. How does this business make money?
When looking at something as complex as a company, the #1 place to start is also the simplest. What does this business do? How does it make money?
For example, Starbucks sells coffee and food to people, some of whom sit inside to eat and the rest take it away. Adobe sells software products to mostly creative customers in exchange for an annual subscription fee.
If you can’t describe this in one or two sentences, then you don’t know the business well enough.
2.Who is the customer?
No matter what business you’re looking at, the customer relationship is essential to understand. You want to understand the offer, how decisions are made, and the overall value proposition.
You might want to know:
- What’s being sold: a good or a service?
- Is the product differentiated or a commodity?
- Is this good discretionary or a staple?
- Is the customer an individual, business, nonprofit or government? (
- Can the customer live without the good or service, or is it mission-critical?
- What’s the price as a % of the customer budget?
- Does the customer buy once? Or repeatedly?
- What pain or problem is being solved?
- Can the customer easily change providers? Or are they sticky?
- Is the customer price sensitive? How much pricing power does the company have?
- How many customers does this business have?
All else equal, the more invaluable a good or service is to someone, the more likely there is pricing power (which is ideal), and revenue is predictable or recurring.
3. What’s the nature of revenue?
Speaking of revenue… what does it look like?
There are many ways to make money in a business and sustainably generate wealth over time. That said, what’s better? Lumpy unpredictable revenue? Or visible, recurring revenue that grows over time?
All else equal, attractive revenue streams are predicable, recurring, and growing.
So, some questions to ask:
- When a customer makes a purchase, is revenue one-off or recurring?
- Is revenue flat, declining or growing?
- Is there a subscription?
- How does the company get paid? Upfront? After services are rendered?
- Is revenue dictated by a contract? What are the key terms?
- Is revenue cyclical?
- What is driving revenue growth: price or volume?
- More revenue per customer or new customers?
- New products?
- New geographies?
- Organic growth (from existing operations) or acquisition growth?
4. How stable are the costs and margins?
Revenue is obviously not the only driver of wealth creation though. Just as important are the costs associated with the business.
- What are the main costs associated with this business? Are they fixed or variable?
- Are margins attractive? Stable? Predictable? Cyclical?
- Does this business have natural economies of scale?
- When revenue is impacted in this business, do margins get hit too?
- What are possible hidden or runaway costs/liabilities?
5. Is there a sustainable moat?
A moat is a distinct advantage that sets a company apart from its competitors and makes it difficult for them to replicate or surpass its success.
For example, companies like Coca-Cola or Apple have built strong, recognizable brands that create customer loyalty and make it difficult for competitors to gain market share. Social media platforms like Instagram or LinkedIn benefit from network effects, where the value of the platform increases as more users join, making it challenging for competitors to attract users away.
Moats have varying levels of longevity. The stronger the entrenchment of a moat, the better the position of a business.
6. How’s the competition?
All else equal, less competition = more pricing power and growth opportunity. More competition = less pricing power and growth opportunity.
On the extreme end of this spectrum are monopolies and oligopolies with a lot of pricing power. On the other are commodity producers, with undifferentiated products and no pricing power. For example, many Canadian businesses – like banks – are functionally protected oligopolies that generate above average returns compared to global peers. Not out of excellence but lack of competition.
When considering competition, the present state is not the only consideration to make. What also matters is how the current level of competition is strengthening or disempowering the business. For example, sometimes, isolation for too long can make a business weak (“Galapagos island risk”). When businesses get complacent and lazy for too long, they can be unprepared for when real new entrants show up.
7. What needs to be true for this business to win?
Every business has different ideal and also necessary conditions. Knowing a company requires you to know what “needs” to be true for them to be successful.
For example, maybe the business you’re looking at requires:
- The Internet
- Growth in China
- Low interest rates
A certain technology - People to like puppies
- Access to a certain resource
A certain kind of food to stay in fashion - The government upholding a specific law
Everyone using the same social media platform - A key industry to stay healthy international trade
Whatever a business “needs” to be successful, seek to understand explicitly. This will help you map out both opportunities and risk.
8. What’s the natural end state?
How does this business finish? Maybe you don’t know (usually you don’t know). But walking through this question will force you to imagine the spectrum of possible outcomes and growth trajectories.
9. How can this blow up?
Finally — one of the most important questions. How could this company fail?
To know a company is also to know what would blow it up. What would it take to lose it all?
