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

The DIY Investing Podcast

Release Date: 01/31/2021

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More Episodes

Mental Models discussed in this podcast:

  • The Pareto Principle (80/20 Rule)

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Twitter Handle: @TreyHenninger

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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.