Mental Models discussed in this podcast:
- The Pareto Principle (80/20 Rule)
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How much time should you spend researching stocks?
- It Varies
- As long as it takes to answer your questions
- 80/20 Pareto Principle
- 10 hours – I don’t think I’ve ever spent more than 10 hours before buying a stock I like.
How to prioritize your research time
- First ten minutes: Is it cheap?
- If you can’t answer in ten minutes, the answer is NO.
- Next 1-2 hours: Is it good?
- If you can’t answer in 2 hours, the answer is NO.
- Next 8 hours: Is it safe?
- If you can’t answer in 8 hours, the answer is NO.
- The efficiency of research time is important:
- The most important: Safe > Good > Cheap
- The easiest to verify: Cheap > Good > Safe
- All you need to know in ten hours:
- Is this my best current idea?
- Is it better than something I currently own?
- You need to answer “YES!” to both.
- If you hold cash, then the second question becomes:
- Is it better than cash?
The process of researching stocks requires a significant amount of time investment. You should optimize the time you spend researching by focusing on three questions: Cheap? Good? Safe? You should be able to answer in ten hours or less.
My personal process focuses on two additional questions: Is this my best current stock idea? Is this company better than something I currently own? If you can answer both questions affirmatively, you should probably buy the stock.