Due Diligence Questions
Why due diligence questions?
At White Loch Capital Management we want to be able to exploit opportunities across both our Compounders and Workouts framework. We want to be like the proverbial Swiss Army Knife, with many tools in our tool box for analysing different opportunities. Therefore, we believe a document like a checklist or scoresheet is too ridged for our investing framework and cannot adequately encompass the different opportunities that we want to exploit in the market.
The purpose of this document is to have a list of thought provoking questions that will help guide us through the stages of a deep dive analysis and will help provide a structure to our research process. It is by no means an exhaustive list of questions and we fully expect the list of questions to evolve over time. Although this document is intended to guide us through a through deep dive of a business it can also help lead us to killing an idea very quickly. Our goal is to find one foot hurdles where the investment thesis is easy to understand and the due diligence process is easy because company disclosures are great and management are willing to talk with us. What we want to avoid is having to dig through footnotes to try untangle opaque accounting and poor disclosures.
Our due diligence framework starts at Idea Generation and the pitfalls that come with certain sources of ideas. We want to quickly reduce the biases that come with certain sources such as halo effect, likening tendency and paying more attention to confirming evidence than confirming evidence. Next we consider the financial statements looking for any glaring “no’s”. After the financial statements we will examine the Moat of a business, Growth potential, Management and then do an Industry analysis. Next, we want to whittle down the investment thesis to the few key drivers of value (KPIs) in this thesis. Then, we consider the value of the business and if it is offering a margin of safety and any Catalysts that will unlock value. Finally, before pulling the trigger we re-examine any biases that may be clouding our judgement.
In Appendix 1 there is a list of some of the resources we use to source ideas and use during the investment research process.
In Appendix 2 there is a graphic visualization of our investment frameworks.
If you wish to look at our due diligence questions find the file attached.
Email: whitelochcapitalmanagement@gmail.com
Twitter: @WhiteLochCM