Actionable insights — Buying 3 Stocks

1. Sort every candidate into good / great / gruesome before you look at the price

1. Ask one question of the business: to earn another dollar of profit, how many dollars must the owner put in?
2. Gruesome — grows fast, consumes large capital, earns little; no moat and price competition (airlines). Exclude regardless of price.
3. Good — real moat and real customer value, but growth must be bought with reinvestment ("pay more to earn more"). Ownable, but the compounding is capped by the capital bill.
4. Great — moat, high returns on capital, and growth that arrives without much new capital, so the cash is free to leave the business or fund the next one.
5. Only after the sort do you argue about valuation. In a market where good and gruesome businesses are "priced for perfection," the sort is what protects you.

• Maintenance capex disguised as growth capex — a "great" business that quietly needs replacement spending is a good business with better accounting.
• A business that was great becoming good as it saturates its market and starts buying growth.

2. Test "capital-light" with the marginal-unit question, not with a ratio

1. Name the company's unit of output — a transaction, a policy, an advised dollar, a subscription.
2. Ask what it costs to serve one more of them. If the honest answer is "essentially nothing," the business is capital-light in the way that matters.
3. Confirm with the financial trace: high margins, low capex-to-sales, and free cash flow that exceeds accounting profit.
4. Then look at where the surplus cash goes. A capital-light compounder with nothing to reinvest in should be visibly shrinking its share count.

• Buybacks that merely offset stock-based compensation — the share count, not the buyback dollars, is the test.
• Capital-light businesses that need heavy marketing instead of capex; the money still leaves.

3. For an insurer, underwrite the combined ratio gap — and buy the cycle's soft leg

1. Take the combined ratio (claims + expenses as a percentage of premiums). Under 100 means the insurance itself is profitable before investment income.
2. Compare it with a respected peer's, and insist on an explanation for the gap that is structural — niche focus, an own-built system, in-house claims — not a run of luck on losses.
3. Establish where the underwriting cycle is. Prices falling because capital has flooded in is a soft market; that is when the shares de-rate.
4. Ask whether the market is pricing the soft market as permanent. If the advantage is structural, the cycle's low is the entry point rather than the exit.

• Growth in premiums during a soft market — an insurer growing while prices fall may be buying market share with underwriting standards.
• Reserve releases flattering the combined ratio; the gap should survive on current-year losses alone.

4. Specify a purchase in three numbers: dollars, shares, and a limit

1. Decide the position increment in dollars first — that is the risk decision, and it forces a comparison across candidates.
2. Convert to a share count at the price you are willing to pay, not at the last trade.
3. Set a limit price and let the order go unfilled if the market moves away. A named limit is what stops conviction from becoming price-insensitivity.
4. Publish or record the three numbers before executing, so the decision cannot be rewritten after the fact.

• Limits that never fill turning into a permanent "almost bought" list; a limit needs a review date as well as a price.
• Rounding the share count up to spend the full dollar allocation — the dollar figure is the constraint, not a target.

5. In an expensive market, add to what you already rank highest rather than widening the book

1. When the opportunity set looks poor, resist the reflex to hunt for new names — a stretched market is exactly when new ideas are least well vetted.
2. Go back to your own conviction ranking and ask which top-tier holdings are furthest below their own valuation history.
3. Add there. You are buying more of something already underwritten, which is a lower-variance use of capital than a fresh position.
4. Keep the number of holdings flat; let the weights do the work.

• Concentration creeping past what the thesis can carry — adding to winners and losers alike needs a stated maximum weight.
• Averaging down on a name whose reason for cheapness has changed; re-underwrite before you add.

6. Use consensus growth expectations as a market-level sanity check

1. Find the aggregate earnings growth rate embedded in analysts' index forecasts, and put it beside the long-run historical rate.
2. If the forecast is a multiple of the norm, treat it as a statement about sentiment rather than about earnings.
3. Pair it with a factor-spread reading — momentum versus low volatility, or quality versus momentum — to see which side of the market the optimism is concentrated in.
4. Convert the reading into a filter tightening, not a market-timing call.

• Aggregate forecasts dominated by a handful of index heavyweights; the median company's expected growth may be ordinary.
• The gap closing through quality re-rating rather than momentum de-rating, which changes what you should be buying next.