109 - How much time should you research a stock before buying?

Mental Models discussed in this podcast:

• The Pareto Principle (80/20 Rule)

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode109

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?

•  

Summary:

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.