This piece is also available in 3 parts, with a link for the first one.

This article will follow the format I use in my deep dives. It will consider a business review covering the products and services sold by the company, followed by an examination of the market structure and competitive advantage, followed by an assessment of the company’s life cycle and a review of market segments (such as quality, value, etc.). Then in the second part, the financial aspects, a management analysis, and capital allocation, and in the third and last part, an outlook based on bullish and bearish arguments and the company’s expected returns.

Subscribe now

Here are the two first articles in case you missed it:

Part One - The business

1. Introduction

The first question to ask is: “What does the company sell? What products and services does the company offer?”

This is the core of the study, around which all other responses will revolve. It is therefore necessary for you to review the various products and services and the markets in which they are sold. This requires you to know what market shares they hold.

Obviously, a company does not operate in a vacuum; it is necessary to identify its environment—that is, its customers, suppliers, and competitors.

• What are the company’s customers looking for in this product? How many are there? Do they purchase the product directly from the company or through a distributor? Does the company have a major customer that poses a risk?

• As for suppliers, who are they? Is there a critical dependency on any of them, or does any of them have pricing power?

• For competitors, we will seek to determine their market shares and their products.

Finally, at this stage, we can ask ourselves what ethical issues or risks the company faces. This is something I consider early enough in my research to rule out candidates who wouldn’t be a good fit for me.

Once you’ve taken this initial look at the big picture, the question to ask yourself comes back to the products: “Am I able to determine whether the company’s products or services are superior to those of the competition?”

That’s Peter Lynch’s famous “Invest in what you know.” If you can answer that question, great—you’re probably onto something. For example, in my own circle, I’ve noticed that the people I meet place a higher value on iPhones. That my kids, like everyone else, always prefer Coca-Cola to any other drink on earth. That if people had to keep just one streaming service, the majority would choose Netflix.

There are many excellent investment opportunities available to us as individual investors, and they do not require any special skills.

Conversely, if you are unable to determine whether the company outperforms its competitors based on anything other than the numbers, you will always have a hard time keeping your cool during a market downturn and forming a clear opinion about your investment.

A 2018 study by Hendrik Bessembinder titled “Do Stocks Outperform Treasury Bills?” indicates that, among stocks listed in the United States between 1926 and 2016 (approximately 25,300 securities), only about 4% of the securities accounted for all of the stock market’s net wealth creation over that period. The remaining 96% did no better than one-month Treasury bills (i.e., short-term U.S. bonds).

A follow-up study, expanded to include 62 countries over the period 1990–2020, found an even more concentrated result: 2.4% of the world’s publicly traded companies accounted for all $75.7 trillion in net stock market wealth creation during that period.

The takeaway from this point is that the stock market’s performance is driven by a very small number of winners and a myriad of losers. And it is these few companies that will be the gems of your portfolio.

These are companies that I refer to as “category definers,” because they have helped create a product category in which they dominate the competition—or better yet, have no competition at all.

This superiority stems in particular from the market structure and the differentiation these companies have succeeded in achieving in their market.

2. Market Structure

2.1 The Model of Pure and Perfect Competition

One of the first topics I studied as an undergraduate economics major was the model of pure and perfect competition, because it provides the framework within which many companies operate.

We’ll see why this model is the bane of shareholders. It has several characteristics:

The implication of these four points is that, in this model, firms’ long-run profits tend toward zero, because any profit will attract competitors. Increased competition will drive prices down until producers go out of business, thereby restoring the equilibrium price. The price is therefore equal to the marginal cost (the cost of producing one additional unit), and the return on invested capital (ROIC) is equal to the WACC (the cost of capital).

Agricultural commodities such as bulk coffee, corn, wheat, and soybeans come close to this model: there are thousands of producers selling the same product in a market where anyone in the right climate can start growing that crop, and where price information is available on international markets. The foreign exchange (forex) market is also similar.

Every company will obviously seek to break free from this model, with varying degrees of success depending on the “imperfections” present in its market—which are referred to by the academic term “competitive advantage.” The most famous investor of all, Warren Buffett, coined the term moat to describe this concept, and it is now commonly used in the financial world. It is precisely because it is possible to break away from this model that individual investing makes sense.

Before examining the specific mechanism that enables this escape (the “moat,” discussed in more detail below), it is helpful to first determine where the company falls on the spectrum of market structures.

2.2 Market Structure: From Monopoly to Niche

On one end of the spectrum is the model of pure and perfect competition, and on the other end is the monopoly, which poses societal challenges. In between, there are several gradients worth exploring:

• Monopoly : A single firm serves the market. Since users cannot find alternatives to the firm’s products and services, the firm’s bargaining power is disproportionate. The regulator typically seeks to regulate or break up this monopoly, or to turn it into a public utility. Monopolies often exist in the form of public utilities (Con Edison in New York, PG&E in California, and airports when there is only one at the local level, such as in Zurich or Florence). Often, this type of market is maintained when there is no practical reason to allow competition to enter.

• Duopoly : Two dominant players share most of the market—for example, Visa and Mastercard in payment networks, or Airbus and Boeing in long-haul aircraft. They manage to coexist because neither has any interest in triggering a price war that would hurt both of them equally. This type of market is often very profitable for shareholders, and it is easy to track the market by following the two leading companies.

• Oligopoly: A handful of players (usually 3 to 5) share a market with high barriers to entry—competition may be divided into market segments allocated to each player. The goal is always to avoid a price war, which would be costly for all players. It is also possible for all players to agree on a market price; this is known as a cartel. Such an agreement tends to draw the ire of regulators.

• Niche market: a market that is too small, too specialized, or not glamorous enough to attract serious competitors—there’s no need for a legal monopoly or a patent; the market’s size or specialization itself acts as a barrier (no one bothers to enter a market whose potential is considered too limited)

• Pure and perfect competition: no firm makes a profit.

The general rule to remember is that the best competition is no competition at all, or as little as possible.

This classification provides a useful overview of the market and its existing players. We must now examine the reasons why new players cannot enter this market—that is, the company’s competitive advantage.

2.3 Competitive Advantage (Moat)

This article is not intended to be exhaustive on every point, so I will outline the main moats you should know about:

• Switching costs: switching costs — it’s expensive or a hassle to leave,

• Network effects: The product becomes more useful as more people use it

• Brand: Customers pay more for the same product because of the name

• Economies of scale: The largest product is structurally less expensive than the others because fixed costs are spread out

• The difficulty of replicating a product

• Regulatory or intangible assets: licenses, patents, rare permits.

Often, the best companies have multiple competitive advantages that grow stronger over time

On the other hand, keep in mind that what can reshuffle the deck within the market is technological change, which is a double-edged sword: it can help established companies solidify their position—or work against them.

Let’s take Coca-Cola as an example. Consumers place a higher value on Coca-Cola by choosing it over a cheaper alternative. Decades of advertising and history have linked it, in the minds of consumers, to sporting events, sharing, and a polar bear. Behind this beverage lies the entire world of American soft power.

Yes, the product can be replicated by any chemist, but the name and visual identity remain protected by a trademark.

In terms of the costs of change, Coca-Cola has locked out the competition with distribution contracts that are unbeatable due to the volumes sold. At the local takeout restaurant, there’s often a Coca-Cola fridge. Doing without it would mean replacing the fridge (which is certainly sold at a competitive price), and doing without Coca-Cola products would mean cutting back on one of its easy sources of high-margin revenue. If you leave Western countries, your choices for non-alcoholic beverages will often be limited to water, local sodas, or products from the Coca-Cola lineup. The latter are therefore, by nature, much more competitive.

Competitors’ products can threaten the company through e-commerce, reaching consumers directly without going through a century-old distribution network. However, Coca-Cola can still try to acquire the most promising startups early in their development, before regulators block the merger to maintain competition in the market.

Warren Buffet a eu la phrase célèbre: “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”

It is important to note that a moat is built over time and that, by its very nature, a new company will not have one. Everything rests on the pillars of superior products and services and high-quality management.

3. Life Cycle and Framework for Analyzing the Initiative

3.1 The Life Cycle of a Business

A company can be viewed in an organic way, as having a life cycle: it starts small with a product or service, then grows and develops a business model that becomes increasingly efficient, enabling sustained growth over time. The business, which initially operates at a loss, eventually manages to turn a profit and sustain that profit over the long term. Growth is strong at first because the company is starting from a small base, then slows over time until it stabilizes. Finally, the decline phase begins, which can occur more or less rapidly depending on the nature of the business.

Aswath Damodaran, professor of corporate finance and valuation at New York University’s Stern School of Business, offers excellent resources, particularly on the corporate life cycle. The images below are taken from one of his articles:

Musings on Markets

The Corporate Life Cycle: Managing, Valuation and Investing Implications

As I reveal my ignorance about TikTok trends, social media celebrities and Gen Z slang, my children are quick to point out my age, and I accept that reality, for the most part. I understand that I am too old to exercise without stretching first or eat a heaping plate of cheese fries and not suffer heartburn, but that does not stop me from trying occasio…

Read more

2 years ago · 159 likes · 4 comments · Aswath Damodaran

Depending on your experience and investor profile, you will likely develop preferences for certain investment life cycles, styles, or factors.

3.2 Investment Styles

We often hear about Quality, Value, and Growth stocks, and we can explain what these terms mean based on the framework outlined above.

• Growth: targets the Young Growth and High Growth stages—the investment is based on the company’s future trajectory, expected revenue, and profits.

• Quality: Targets companies in the High Growth or Mature Growth stages. The company is well-established, as are its competitors; it has one or more moats and is poised for significant future growth.

• Dividend: This strategy targets the Mature, Stable, and Decline stages, where the company generates cash but lacks opportunities for reinvestment. It chooses to return this cash to shareholders in the form of dividends or share buybacks. This category notably includes so-called “cannibal” companies, as their stock price is driven upward primarily by share buybacks.

• Value: Does not target a specific stage but rather a discrepancy between price and value, regardless of the stage. A company can be classified as a “value” stock at any stage of its life cycle. Generally, there is an underlying issue, or the market perceives it that way.

This is a simplified explanation: when you look at the details, a company may share characteristics of several different investment styles. Similarly, there are several investment styles, and they can coexist within the same market.

Beginner investors tend to turn to dividend-paying stocks for their safety and the almost magical appeal of receiving regular dividends. However, the lack of business growth and opportunities for reinvestment often leads to low returns that underperform the benchmark index.

They will also tend to gravitate toward value stocks, thinking they’re getting a good deal (“Company X has a P/E ratio of 5, while its competitors have a P/E ratio of 15—I’m getting a great deal”). In most cases, the reason is valid and stems primarily from issues related to the company’s business or future prospects.

Growth stocks are also very popular because, even though most of them will underperform the index and carry risk, a handful of winners offer the prospect of multiplying your investment in just a few years.

Ultimately, quality stocks will offer the best risk-return ratio due to their competitive moat and long-term growth prospects. As a result, they often command higher prices than other stocks. As with value stocks, the right time to invest is when the company appears (the word “appears” is important) to be facing temporary difficulties.

For educational purposes, I believe the best choice of three stocks to start with is “quality” stocks, given their long-term potential, financial stability, and competitive advantage.

Due to data quality limitations, I can provide a performance breakdown covering the past 15 years, but not beyond that. We have been in a nearly continuous bull market since then, with the exception of dips in 2018, 2020, and 2022.

3.3 Investment Factors

Investment styles can be cross-referenced with factors, which incorporate this classification and add several points:

• Size (small-cap stocks have historically outperformed large-cap stocks over the long term). Stocks are classified as small-cap when their market capitalization is between $300 million and $2 billion, mid-cap between 2 and 10 billion, and large-cap above that.

• Momentum (stocks that have performed well over the past 3 to 12 months tend to continue doing so in the short term). This reflects a well-known investor bias: investors tend to buy what’s rising and sell what’s falling.

• Low volatility (the least volatile stocks offer a surprisingly good risk-return profile, contrary to intuition),

Aswath Damodaran wrote, “A good valuation is a bridge between stories and numbers.” We will therefore move back and forth between the qualitative aspect—part of which we have already presented—and the quantitative aspect, more prominent in the “Financials” section. By cross-referencing the data from the first and second parts, we will provide an overview of the company’s current situation, before exploring its future in a third part.

Part 2 - Financials and Management

Analyzing financial statements is, on the one hand, very straightforward, as one can focus on a few key indicators and obtain initial results that are both robust and compelling. This is also the area where finance professionals have the most data readily available and the greatest ability to interpret it using relevant analytical frameworks.

Gaining an advantage over them in this area is very complex and requires in-depth work. In a future article, I’ll discuss how, despite the excellent candidates who choose a career in finance, individual investors have undeniable advantages. Stay tuned.

One of the key advantages of investing in the stock market is the equal access to information shared with all market participants—namely, public information. To form your own opinion about a company, you have access to the same documents at virtually the same time, and insiders who possess an informational advantage are required to disclose their stock purchases and sales. You’re therefore on a level playing field with other investors and can buy and sell shares in some of the world’s best companies, often for less than $1,000, with trading available nearly 40 hours a week.

So the battle is being fought in the financial documents, which we’ll look at right now.

The three financial statements

Any company listed on an index must follow a number of disclosure rules specific to its listing. In the United States, companies typically publish an annual report called a 10-K and quarterly reports called 10-Qs, which are available on the SEC’s website (the U.S. securities regulator) or on the companies’ own websites (under the “Investor Relations” section). In addition, companies hold earnings calls—presentations of their results that include a question-and-answer session with analysts—and transcripts of these calls are typically made available afterward.

For the rest of the world, the principle is generally the same. Keep in mind that some companies publish their results only in their own language, which makes them difficult for international investors to understand, or they publish their results on a semi-annual basis. This means that any bad news arrives several months later, which amplifies the market reaction, especially given the long-term outlook.

The three financial statements are the income statement, the balance sheet, and the cash flow statement. Accounting standards exist; the main ones are Generally Accepted Accounting Principles (GAAP) in the U.S. and International Financial Reporting Standards (IFRS) in the rest of the world. IFRS is based on GAAP, with some differences between the two.

I’m keeping this brief on purpose; there’s a lot to say about these topics—enough to fill years of study.

The Income Statement

The income statement is a report that shows how the company generated profit from its operations over a given period. It all starts with revenue, from which costs are subtracted to arrive at operating income—a numerical measure that indicates the extent to which the company is generating profit from its operations. After deducting financial and extraordinary items, we arrive at net income, which measures the amount of money available to shareholders.

The key items to look at are:

• Revenue

• Gross Margin and Operating Margin

• Net margin (if I have $1 in revenue, how much profit do I make?)

• Financial and Non-Recurring Items

• Net income

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

Depending on the business, some companies handle very high volumes with very low margins (e.g., retailers like Walmart or Aldi), while others handle low volumes with high margins (e.g., service or luxury companies). It all depends on the industry and the company’s competitive advantage. It doesn’t make sense to compare different industries directly.

Generally speaking, investors view an increase in margins as a sign of a stronger competitive advantage—and therefore as excellent news. This remains a general rule; the specifics should be examined on a case-by-case basis, depending on the context.

The Balance sheet

If the income statement is a movie, the balance sheet is a snapshot. It shows the company’s assets (and net worth) and how they are financed. The sharpest minds will have noticed that the balance sheet is… balanced: assets always equal liabilities.

A distinction is made between assets (items to be financed) and liabilities, which represent the source of financing.

These assets and liabilities can also be either current—with a useful life of less than one year—or noncurrent—with a useful life of more than one year.

This leaves us with four line items on the balance sheet, as shown in the image below:

The key components are primarily found in the fixed assets. Peter Lynch, the famous investor, has said that he considers current assets to balance each other out, so that only the fixed assets need be considered—whether purists like it or not.

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

The key items to look at are:

• Inventory levels

• Cash and cash equivalents

• The ratio of long-term debt to equity

• The number of shares

But if I had to choose just one, it would be the debt-to-equity ratio (= (long-term debt - cash and cash equivalents) / shareholders’ equity).

Peter Lynch also noted that a healthy debt-to-equity ratio could be as high as 50 percent. Beyond that, in the event of an economic downturn, the company would be exposed to a spiral of debt that could lead to bankruptcy or the dilution of existing shareholders.

You’ll notice that in the example, Booking has negative equity. This is the result of share buybacks carried out year after year. It’s not a problem—neither from an accounting nor a business perspective—and sometimes occurs among large-cap companies that have conducted a significant number of share buybacks.

Another key factor is the change in the number of shares. Most Quality companies will buy back shares, either to reduce the number of shares outstanding or to pay a dividend. Share buybacks offer several advantages:

• It is a sign of confidence in the future of management

• Fewer shares can cause the price to rise more easily (or fall). In 2021, Xavier Gabaix (Harvard) and Ralph Koijen (University of Chicago) published “In Search of the Origins of Financial Fluctuations : The Inelastic Markets Hypothesis” — one of the most consequential papers in modern finance. Their central finding : financial markets are far less elastic than classical theory assumes. In equity markets, $1 of net inflow moves total market capitalisation by approximately $5.

• The tax treatment of share buybacks (capital gains) is generally more favorable than that of dividends. And as long as you don’t sell, there is no tax.

Growth companies have much greater capital needs and typically issue new shares, a process known as dilution. If you’re diluted by 4%, that amounts to a 4% loss on your investment. However, these new funds will enable the company to grow—presumably by more than the amount of that dilution. This is a very strong implicit assumption in growth investing. It isn’t necessarily a bad calculation for the best companies, but dilution raises the bar that your investment must clear to achieve the expected return.

The Cash Flow Statement

This last document is very interesting because it shows us where the cash is going. The table starts with net income and breaks down cash flow into three categories:

• Operational Workflows

• Investment Flows

• Funding Flows

Similarly, here is another example from Booking in its 10-Q for the period ending June 30, 2026.

The key items to look at are:

• What is the difference between free cash flow (FCF) and net income?

• How many years of operating income would it take to pay off the debt?

• How many share buybacks or dividends are made?

• What are the amounts of stock-based compensation?

Based on the data in the financial statements, we calculate an extremely useful metric: free cash flow (FCF). It is calculated by subtracting capital expenditures (CapEx) from operating cash flow (Cash Flow from Operations).

It answers the question: “How much cash is actually left in the coffers to pay off the debt or pay dividends?”

FCF is a more accurate measure of a company’s ability to create value, unlike net income, which can be manipulated more easily through accounting.

It is necessary to identify the differences between the two.

Just as in a police investigation, reading one of the documents provides information, but it is only by cross-referencing all three documents that one can form a comprehensive picture of the financial situation. This statement can, in fact, be extended to our entire study of quantitative and qualitative factors.

All three documents contain numerous footnotes explaining how the data is calculated in cases where questions about accounting treatment may arise. They often include all sorts of subtleties intended to make the situation appear more favorable. The devil is in the details—in this case, the accounting details.

We mentioned Aswath Damodaran in the previous episode. Here is an overview of the key financial items and expected behavior based on the company’s life cycle for the three types of cash flows.

Profitability Ratios

Growth indicators are fairly straightforward: simply compare growth with recent fiscal years, focusing primarily on revenue, margins, and profit (FCF and net income). Profitability indicators are a bit more complex and warrant your attention when cross-referencing the data. In fact, market concerns often center on these points. Therefore, the ability to interpret these figures is essential.

Investment

Here is a non-exhaustive list of profitability metrics, starting with my favorite, ROIC.

ROIC (return on invested capital) :

• Formula: NOPAT (operating income after taxes) / invested capital (debt + equity, excluding excess cash)

• Purpose: It measures the return generated on the capital actually invested in the business—including debt and equity—but not cash.

• Meaning: If a company invests $1 through debt or equity, with a ROIC of 20%, its investment generates $0.20 in operating income after taxes (as long as the ROIC remains at that level). A ROIC higher than the WACC (weighted average cost of capital) is profitable.

• Comments: ROIC can be misleading for companies that engage in aggressive asset write-downs or share buybacks.

There is also a variant called ROCE.

ROCE (return on capital employed)

• Formula: EBIT (operating income before tax) / capital employed (equity + total debt). This includes any excess cash.

• Purpose: It measures the return generated for each euro of capital used.

• Meaning: If a company invests $1 in capital (debt + equity), with a ROCE of 20%, it generates $0.20 in operating income before taxes (as long as the ROCE remains at that level).

• Comments: Does not take into account non-operating cash flows (such as inventory value, which is important for oil and mining companies). Asset impairments automatically push ROCE higher. Misleading for companies with large amounts of cash.

ROE (return on equity) :

• Formula: net income / shareholders’ equity

• Purpose: Measures the return generated for the shareholder on the capital they have contributed,

• Meaning: If a shareholder invests $1, with a ROE of 20%, this generates €0.2 in profit for the company.

• Comments: It may be artificially inflated by high leverage or by low equity (aggressive—or even negative—share buybacks).

These three indicators should be analyzed in conjunction to assess the quality of the business and its management. It is helpful to compare these three metrics for the company with those of its competitors. Note that this is more difficult for companies with several completely different business lines, such as Amazon, which combines retail operations with data center operations.

There’s also ROA, which I don’t use very often:

ROA (Return on Assets) :

• Formula: net income / total assets

• Purpose: Partially corrects the bias in ROE by including debt in the denominator—less sensitive to leverage, more appropriate for comparing companies with different capital structures

• Meaning: If the company generates $0.20 in net income for every $1 of total assets, its ROA is 20%.

• Comments: This metric is less precise than ROIC/ROCE when measuring pure operational efficiency, since total assets also include non-operating assets (cash, equity investments) that ROIC specifically excludes. Furthermore, net income needs to be examined to determine whether it provides an accurate picture of reality.

Here is a summary of the four indicators:

Also note that it is necessary to evaluate investment opportunities and weigh them against profitability: To generate $1 million (in NOPAT), for example, one could:

• Invest $10 million at 10%,

• Invest $5 million at 20%,

• Invest $3 million at a 33% rate.

A company will be able to continue investing as long as its resources allow, depending on its market and the creativity of its management.

Net Margins

There are two key indicators for margins.

Net margin:

• Formula: net income / revenue

• Profit: what actually remains for shareholders from every dollar of revenue, after all expenses have been deducted,

• Meaning: If the company generates $1 in revenue with a net margin of 20%, $0.20 in net income remains for shareholders (as long as the net margin remains at that level),

• Notes: Distortion may occur if the company has subsidiaries in which it owns between 50% and 100% of the shares—in which case, minority interest must be adjusted.

FCF margin :

• Formula: free cash flow / revenue

• Usefulness: How much of every dollar in revenue actually remains as cash after capex is deducted,

• Meaning: If the company generates $1 in revenue with a 20% FCF margin, it converts $0.2 of that revenue into actual available cash (as long as the FCF margin remains at that level),

• Notes: There may be some distortions, particularly if a company sells subscription-based services: only the portion that has already been completed and billed is recognized, not the entire plan.

It is important to compare and analyze the differences between net income and free cash flow—and thus between their margins. This is a useful exercise to perform during your analysis to gain a thorough understanding of specific accounting practices.

A few other metrics that I don’t use:

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric omits too many important factors to provide an accurate picture of the business’s profitability. Charlie Munger had a famous remark on this subject:

Worse still, some companies prefer to report adjusted EBITDA.

A word of advice: Use the figures reported in accordance with accounting standards as your point of reference. Generally, those who present you with adjusted or non-GAAP figures do so to paint a rosier picture of reality—in other words, to make a sales pitch—rather than to tell the truth.

Every rule has its exception: I recently saw a presentation of results from Novo Nordisk that showed sales figures adjusted for two factors: one was a reversal of an accounting provision (a valid reason), and the other was due to an impairment charge related to discontinued drugs (a debatable reason). I’ll leave you with the image below, which pretty much sums up my opinion on the matter:

Here is a summary of the key profitability metrics:

3. Management

There is a fundamental problem between shareholders and managers: the manager might seek to line his own pockets with shareholders’ money instead of acting as a good steward. This has been theorized by several well-known authors.

The renowned Adam Smith had already pointed out in *The Wealth of Nations*:

The directors of such companies, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

In 1976, a seminal article by Michael Jensen and William Meckling (“Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics) defined agency theory, a famous milestone in the history of management.

They define the agency relationship as a contract under which the principal (the shareholder) delegates decision-making authority to an agent (the manager), and argue that if both parties seek to maximize their own utility, there are good reasons to believe that the agent will not always act in the principal’s best interest. It was this article that gave rise to the term “agency costs”—the cost of this conflict of interest.

The goal of this entire section will therefore be to answer the following questions:

• Who are these managers?

• Are they effective?

• Can I trust them with my money?

The order of the questions is designed for educational purposes. When analyzing actions, you will inevitably ask yourself all three questions at the same time.

To assess the management team, simply asking your favorite AI a question, reviewing the financial documents, and taking a look at LinkedIn should provide you with all the information you need.

Management Effectiveness

Based on my studies in management and my experience as a project management professional, the theoretical definition of a good manager is based on performance indicators and their ability to meet them. It is very difficult to distinguish a good manager from a favorable situation. This point is essential: a good manager is often considered as such because they are successful.

The challenge here will be to distinguish between economic conditions and the manager’s performance.

One way to do this is to examine the track record—that is, actual performance versus promises—and thus compare the set goals with the actual results using the financial statements from recent fiscal years.

The renowned Warren Buffett wrote in his 1979 letter to shareholders:

You’ll notice the characteristic AI style of “it’s A, not B”—nearly 50 years ahead of its time. A pioneer.

In practical terms, this quote means that you can significantly increase your profits by investing heavily, even with a low rate of return. It’s like saying that to double your savings, you can either double your existing capital through your investments or contribute the same amount from your savings.

True management competence is measured by the return on capital already invested.

Ideally, then, you’ll want: excellent management capable of generating very strong returns on invested capital, along with the reinvestment opportunities inherent in the business. Ideally, you’ll want plenty of both if you’re taking a long-term view.

Its management ability is measured by capital allocation, which varies depending on the stage of the life cycle:

• First and foremost, a company will finance its organic growth through items such as capital expenditures, R&D, and working capital needs. This is the best use of capital as long as the return on that reinvestment exceeds the cost of capital. As the company grows, these opportunities diminish over time. In economics, this is known as the law of diminishing returns.

• If there is capital remaining beyond what organic growth can absorb at a good rate of return, three options are available: external growth (M&A), dividends, or share buybacks. Be careful, though: external growth is generally a bad bet for shareholders. Personally, I prefer to avoid share buybacks, which are often based on overly optimistic assumptions and coincide with market highs.

• Management is expected to return to shareholders any funds that cannot be invested with a sufficient rate of return.

• If you invest in dividend-paying companies, check their ability to pay dividends during difficult times (COVID-19 in 2020, the Global Financial Crisis in 2008, etc.).

Also keep in mind that, in a young company, good management is the source of competitive advantage, and that advantage will grow over time. Poor management—or management grappling with structural challenges in its business—will see its competitive moat erode and, consequently, its profitability decline.

Trust

The best way to earn management’s trust is to make sure your interests are aligned with theirs.

Nassim Nicholas Taleb in his 2018 book, Skin in the Game: Hidden Asymmetries in Daily Life, describes a concept that has since been widely cited: “Skin in the Game.”

If the manager holds a significant—or even a majority—stake in the company where you’ve invested, your interests are aligned because he shares your goal: to drive up the stock price and thereby maximize your wealth.

We will therefore prioritize seeking out founding executives, who have the advantage of holding a significant stake in the company and possessing a long-term vision. The superior performance of owner-operators has been proven over the long term, due to the natural selection that occurs over time between founders who are excellent managers and those who stagnate or go bankrupt.

When it comes to CEOs who are not founders, it is important to review their compensation plan in particular: Is it in cash? In stock? What performance goals is it tied to?

By choosing a founder who runs the company, you stack the odds in your favor, but it doesn’t guarantee success. I experienced this firsthand as a counterexample when I invested in a promising Italian consulting firm. For several reasons, I sold my position two years ago, one month before the bombshell in September 2024: The press reported that the founder and CEO of Digital Value, Massimo Rossi—founder, CEO, and largest shareholder of Digital Value (an Italian IT company listed on the Milan Stock Exchange)—was arrested on October 16, 2024, for corruption and rigging public bids in the Sogei case (the IT company of the Italian Ministry of Economy). He resigned that same day, and the stock price plummeted during the trading session. In less than a month, the stock plummeted by 80%. It was delisted a few months ago.

The executive had previously been praised for his management skills and vision. This is just one example among many of the risks associated with portfolio concentration and what is known as company-specific risk.

Furthermore, a good place to assess management’s integrity is in the financial statements. I’ve previously discussed metrics that are adjusted to paint a rosier picture than usual, but management under pressure to deliver good numbers may be tempted to shift their perspective. To name a few examples, I’m thinking of recurring non-GAAP restatements from one quarter to the next, changes in accounting estimates (depreciation periods, provisions), aggressive revenue recognition, and “exceptional” expenses that occur too frequently to be truly exceptional.

The devil is in the details—in this case, accounting details.

This section concludes the static analysis of the company and helps address some initial questions regarding the quality of the business and your desire to keep it in your portfolio. The next step will be to look ahead, considering both bullish and bearish scenarios, and to estimate an expected return based on the company’s possible futures.

Part Three - The Outlooks

1. The Two Theses

The goal of this section is to present the facts on both the upside and downside possibilities. This is meant to guard against two well-known pitfalls:

• Only considering the upside is wishful thinking, which can cost you dearly in monetary terms.

• Only considering the downside is catastrophizing, which can cost you dearly in terms of regret.

Having solid projections about the future will make it much easier to hold positions psychologically, because you’ll always have a rational anchor with arguments to support you or guide your decisions. Doing nothing is also a decision.

Note that if you don’t have the facts to answer the questions below, your investment thesis isn’t solid, and you’re better off moving on and investing in another company or another sector.

The same works for a stock that has risen sharply — in that case, it’s the reverse:

• Results above expectations

• Guidance raised

• Macroeconomic factors

• Company-specific catalysts: an influential investor taking a stake, a major contract signing, a technological breakthrough

Next, we look at the bear thesis. It generally builds on the “why did the stock drop” elements, going one level deeper:

• Loss of market share to competitors.

• Operating margins under pressure (rising costs, falling selling prices).

• Excessive debt levels or insufficient cash (cash burn).

• An outdated or disrupted business model.

• Management changed strategy, and products no longer sell because they no longer address the right needs.

• Is this a structural problem or a conjunctural one?

In light of this, we must ask ourselves what evidence supports these fears, and whether they are substantiated:

• Analysis of financial statements (balance sheet, income statement),

• sector reports,

• Comparison with peers.

• Supplier and Customer Analysis

To take this line of thinking all the way through, ask yourself the following questions: What if the bear thesis is really true? What does that mean?

The idea is to quantify the impacts described above.

At the end of your argument, you should be able to identify clear criteria that allow you to conclude that the bearish thesis is valid. For example:

• Revenue growth of X% or less

• Margins under Y%

• Competitors’ market share exceeds Z%

Generally speaking, some of the arguments raised are true, but the company will be able to address them easily. Then put yourself in management’s shoes and ask yourself what options they have to remedy the situation. That is the whole point of the bullish thesis.

What specific actions could management take? They can generally:

• Launching new products or changing strategy,

• Start a price war (very bad in the short term),

• Take over a troublesome competitor,

• Focus on its core business by selling or divesting segments,

• Reduce costs.

Next, check management’s actions and communication

• Is management transparent about the difficulties and credible in its solutions? Does management hit its targets from one report to the next? Are they too optimistic?

• What actions has management planned to take? Every action in the plan should improve the fundamentals and restore investor confidence.

As with the bear thesis, you should be able to identify indicators that confirm the bull thesis. For example:

• Revenue growth above X%

• Margins above Y%

• The company’s market share above Z%

These actions need to produce concrete results that address the difficulties. So we look for catalysts, which are specific events that trigger a significant movement in a stock’s price, or in the market as a whole.

They come in several types:

1. Performance catalysts: the company beats expectations.

2. Market catalysts:
   -Index inclusion: which forces thousands of ETFs to now buy the stock.
   -Coverage initiation: when an analyst revises their target price
   -Short squeeze: an upward market move, or a move above a certain threshold, can force short sellers to urgently buy back their position.

3. Strategic catalysts:

• Buyout or merger: an acquisition offer from a major player.

• Spin-off: separating a business division to reveal the hidden value of a subsidiary, which then gets sold by funds and ETFs whose underlying holding, however interesting, no longer fits their mandate.

• Exclusive partnership: becoming the “preferred” supplier of a market leader.

4. Macroeconomic / regulatory catalysts:

• Interest rate pivot: any change in interest rates, particularly US Treasury yields, changes the yardstick against which all investments are compared.

• Changes in commodity prices.

• The end of a recession, or a price change affecting customers’ budgets.

• Regulatory framework changes.

The event happening is one thing, but remember that the market thinks in probabilities. The price adjusts toward the news as the catalyst becomes clearer and clearer — not at the moment it actually occurs.

I also note the blind spots in my research, so I can keep track of unresolved points that may have slipped through the analysis. It’s not possible to answer all of these questions exhaustively — otherwise investing would just be a matter of computing power. Investing requires acting on imperfect information: that means making a decision without knowing everything, but with enough information to act with a good level of confidence.

2. How much?

This section addresses the question of profitability, approached through two methods:

• Valuation, which consists of determining the company’s intrinsic value from its own future cash flows, independently of what the market thinks.

• Pricing, which consists of determining how much the market is willing to pay for those same flows, through a multiple.

I’m not a finance professor. So I’ll leave it up to you to decide if you’re interested in what Aswath Damodaran—who is one—has to say on the subject. He has plenty of free resources on his Substack, YouTube videos, and books that are excellent reads, particularly his book *The Little Book of Valuation*.

When it comes to valuation, the gold standard is the DCF method, which involves calculating a company’s future cash flows and discounting all of its future cash flows to the present to derive its intrinsic value. This value is independent of the market’s assessment of the company. It is, therefore, an intrinsic valuation method.

Personally, I believe that the information needed to accurately perform a DCF analysis (5- to 10-year growth rate, terminal value, discount rate) cannot be estimated with sufficient reliability for most companies. Having built plenty of projections as a project manager, most initial estimates turn out to be completely wrong — even more so the further out the date, or depending on the quality of your starting assumptions. And having made and seen estimates made, there’s a tendency to land on the number you wanted in the first place. The DCF creates an illusion of expertise based on mathematical and logical reasoning whose foundations are often uncertain.

For this model to be relevant, a suitable company must be predictable, which narrows the range of possibilities.

Pricing, on the other hand, involves valuing the company based on comparables. In this case, you believe that the market is generally reasonable but has misjudged a specific value. It is therefore a relative method, divided into equity multiples and firm multiples.

Equity multiples

PE ratio (price/earnings):

• Formula: stock price divided by earnings per share —

• Meaning: how much the market pays for one euro of annual profit. If a stock trades at 20 times earnings (a P/E of 20), you get back your money with the current earnings in 20 years.

• Comments: depends heavily on the company’s growth and risk: you cannot say based on this unique metric that it is cheap or expensive. PE ratio Sensitive to the same accounting distortions as net income covered in the previous article (one-off items, minority interests). Best cross-checked against P/FCFE below, and the PEG ratio.

PEG ratio (PE to growth):

• Formula: P/E divided by the expected earnings growth rate — corrects the raw P/E to compare different growth profiles.

• Meaning: A P/E of 30 with 30% growth gives a PEG of 1; the same P/E of 30 with only 10% growth gives a PEG of 3. Peter Lynch said that a good PEG ratio is when the growth is equal to the PE (ex: 30% growth EPS with a PE of 30).

• Comments: In the case of a cyclical company, the opposite is true. A company’s P/E ratio will drop at the end of a peak (due to investors’ expectations of a decline in the stock price) and will be extremely high at the trough of the cycle,

P/FCFE (price to free cash flow to equity):

• Formula: share price divided by free cash flow to equity per share.

• Meaning: how much the market pays for one euro of cash actually available to the shareholder.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

PBV (price to book value):

• Formula: share price divided by book value (equity) per share.

• Meaning: how much the market pays relative to what shareholders have contributed or left in the company, on the balance sheet.

• Comments: this was the signature formula of the famous investor Benjamin Graham. Since companies now have significant intangible assets (goodwill, brand, software), this key indicator of value investing is used much less frequently.

PS (price to sales):

• Formula: share price divided by revenue per share.

• Meaning: how much the market pays for one euro of sales —

• Comments: the only one of the five ratios that still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

Firm multiples

These take into account not just equity, but the full set of long-term resources available, namely equity and debt, minus net cash, to arrive at enterprise value. The advantage is being able to compare companies with different debt ratios by leveling this base.

EV/FCFF (value to free cash flow to firm)

• Formula: enterprise value divided by the cash available to all capital providers (debt and equity), before any debt service.

• Meaning: how much the market pays for one euro of cash generated by the company and available to all of its capital providers (shareholders and creditors), before any debt service.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

EV/EBIT

• Formula: enterprise value divided by operating income before interest and taxes

• Meaning: measures operating profitability independently of the financing structure (debt vs. equity) and of each country’s tax treatment.

• Comments: allows comparison of companies with very different debt levels without distorting the reading, unlike the PE ratio.

VS (value to sales)

• Formula: enterprise value divided by revenue: it is the firm-side equivalent of PS.

• Meaning: how much the market pays for €1 of sales.

• Comments: it still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

We look for a gap between what the company is worth (as described in the two theses section) and the price we pay for it, with the multiples shown above.

In practice, my method does not involve directly comparing a company to a basket of publicly traded competitors. I prefer to build a matrix of scenarios: estimating the company’s future earnings under various assumptions (bear/base/bull), then cross-referencing them with possible multiples. To make this simple and easy to understand for my readers, I use the P/E ratio after adjusting for non-recurring items.

The idea is to identify a range of possibilities using a pricing scorecard in this format. Then, based on the factors in the bull vs. bear analysis, to determine where my conviction lies.

The goal will be to monitor the company over time and verify that it is on track with my profitability assumptions.

Here’s an example I wrote in one of my articles as part of a deep dive into AppLovin.

So we’ll be looking for the valuation target a few years down the road, but in the short term, the stock price could react in an irrational way. I’ll break this down into two parts: fundamentals and investor sentiment.

The short-term volatility will prompt further reflection on investor sentiment, which will be the subject of another series of articles. For now, we are in the process of identifying three stocks as part of a pilot phase, as mentioned in the first article of the series.

That’s how I do my deep dives.

Ultimately, this is serious research that can take hours—or even days—of work. It’s the price you pay for an investment that you’ll be able to stick with over time, and that will help you avoid many mistakes and sleepless nights of doubt.

Final thoughts

In these three articles, we’ve seen the framework I use—and that I’m sharing with you—for selecting individual stocks. I develop investment cases whenever a stock seems like a great buy to me, based on a classification I outlined in another article. This method involves a detailed analysis, but this investment framework does not apply in every case. The next article will focus on how to identify companies on your own and how to screen them using an investment checklist to narrow down the field.

In addition, I invite you to check out the list of educational resources at the link below:

Subscribe now

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

But when building a portfolio, you’re not going to scrutinize every publicly traded company in such detail to determine the optimal mix. No one can seriously analyze the entire public market. World Bank data indicated a total of nearly 53,000 companies in 2025.

You’ll see that day-to-day investing can be broken down into two parts:

• Monitoring its portfolio companies,

• Monitoring everything else, including potential investments.

To make investing actionable, we’ll need to make some choices and simplify things for ourselves. In this article, we’ll discuss the concepts of the investment universe, information gathering, checklist, and watchlist.

Subscribe now

1.Investment Universe

The investment universe describes what you limit yourself to seeing and studying.

Some investors prefer emerging markets, others favor U.S. turnarounds, while still others prefer blue-chip quality stocks or European small-caps. Anything is possible, but as Michael Porter, a professor at Harvard Business School, once said, “the essence of strategy is choosing what not to do.”

This reduction can be achieved in several ways:

-Warren Buffett coined the term “circle of competence”: Which industries and companies do you understand? Better yet, which ones do you understand better than others?

You’ll have a much deeper understanding of your industry than a financial professional who simply waits for the numbers.

-You may be eligible for tax incentives or disincentives in certain markets. For my part, as a French tax resident, I have access to a typically French investment vehicle, the PEA, which is a tax-deferred account that allows me to reduce my tax liability on stocks within the EU. As a result, given equal returns, I would prefer this economic zone.

-Another possible limitation is of an ethical nature, which is a strictly personal matter. For example, no weapons, no tobacco, etc.

-Some investors will choose to limit risk by excluding micro-caps and small-caps (with market capitalizations under $150 million and $1 billion, respectively). Others will seek them out as market segments rife with inefficiencies.

-You can also filter by investment style, including a few well-known categories:

• Quality

• Value

• Momentum

• Dividend

-Another economically relevant criterion is to target sectors based on their intrinsic profitability. The image below provides a sector-by-sector overview of the past 10 years in the U.S.

As you can see, there is a wide range of returns and volatility across sectors. The IT sector leads the pack due to its scalability (adding an additional user incurs almost no additional cost and is essentially pure profit).

The table below lists the sectors to favor and those to avoid when starting out. As a general rule, avoid cyclical sectors when starting out because it is difficult to assess where the cycle stands, the fundamentals vary in quality, and valuations can be high.

2. Where to Find Information

There are many websites where you can find the financial information you need. Among them, here are a few useful resources specifically geared toward publicly traded companies:

• Marketscreener.com, which provides information on both the economy and publicly traded companies

• https://www.alphaspread.com/ to find figures and ratios about a company and its competitors

https://finance.yahoo.com/, as free general-interest media outlets that serve as alternatives to the major (paid) business newspapers.

• Your broker. I started by shortlisting a lot of companies through my first broker, deGiro, whose company profiles are well-done—and, in my opinion, better than Interactive Brokers’.

There are several ways to find stocks:

• The list of major indices (S&P 500, Stoxx 600 in Europe, Nasdaq 100)

• Screeners, including TradingView, which lets you customize just about every possible setting. WARNING! Using this method to find good companies is a great way to get taken advantage of: often, if a company is undervalued, it’s because there’s a problem.

3. The checklist

The idea in the previous section was to come up with names. Let’s say you come across a new company. My suggested approach is to spend a few minutes checking whether it meets your initial criteria:

• Sector

• Geographic Area

• Ethical criterion

• Level of Indebtedness

• Investment Style

• Market Capitalization

If that’s OK, you can move on to a more in-depth screening process. The simplest approach is to use an investment checklist and eliminate any stocks that don’t meet your criteria. You’ll find a suggested checklist at the link below, which you can adapt to your own criteria.

1. Download the latest annual report and quarterly results from the Investor Relations section of the company’s website.

2. Run the checklist below through your favorite AI, first instructing it: “Answer the following questions using the attached documents, indicating which parts come from your own knowledge and which parts come from the documents.”

You can find the checklist at the following link : https://docs.google.com/document/d/1jZ8-08bBfUore1amb94KmYsr_LVF3dBc4WzYb18p9ds/edit?usp=sharing

If you like it, the idea is to keep an eye on it—often because the price is too high—until you’re ready to conduct a detailed analysis. That’s the whole point of the “Watchlist” section below.

4. The Watchlist

Just because a company checks all the boxes doesn’t necessarily mean it’s a company you should buy right away. The most common issue is price. An excellent company bought at too high a price is still a bad investment. That’s exactly what the watchlist is for: keeping a top-tier company under surveillance, before engaging any capital.

A useful watchlist includes the following for each name:

• The ticker and a checklist, for an overview

• Price tracking, to identify when a buying zone appears to be forming.

• Monitoring momentum to avoid entering the market at the wrong time—after a sharp rally to a temporary valuation peak or during a falling knife.

Here’s a link to the watchlist template I use every day:

https://jbpeter.substack.com/p/portfolio

Before concluding that a company you wish to acquire meets a price criterion, you must first conduct the detailed analysis described in Part 3 to define your investment thesis and verify whether the expected return justifies the risks involved.

Final thoughts

This article concludes the Investing 101 series. You now have the basic items: why invest, how to choose an ETF, how to analyze an individual stock, and finally, how to organize your daily routine so you don’t get overwhelmed by the 53,000 publicly traded companies.

Let’s return to the goal set in Part 1: to find one ETF and three stocks. You now have everything you need to get started on this pilot phase.

The next step in this progression will be to broaden your range of knowledge and delve deeper into each of the topics already mentioned in other modules.

The best is yet to come.

Subscribe now

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

This article was originally a single piece, but given its length, I decided to split it into three parts to make it easier to read and more educational.

The three articles will follow the format I use in my deep dives.

• This first one considered a business review.

• The second article covered the financial aspects, management analysis, and capital allocation

• Followed in the third part by an outlook based on bullish and bearish arguments and the company’s valuation.

Subscribe now

Here are the two first articles in case you missed it:

Investing 101 - Getting started before you buy anything

Investing 101 Part 2 — Choosing Your First ETF

1. The Two Theses

The goal of this section is to present the facts on both the upside and downside possibilities. This is meant to guard against two well-known pitfalls:

• Only considering the upside is wishful thinking, which can cost you dearly in monetary terms.

• Only considering the downside is catastrophizing, which can cost you dearly in terms of regret.

Having solid projections about the future will make it much easier to hold positions psychologically, because you’ll always have a rational anchor with arguments to support you or guide your decisions. Doing nothing is also a decision.

Note that if you don’t have the facts to answer the questions below, your investment thesis isn’t solid, and you’re better off moving on and investing in another company or another sector.

The same works for a stock that has risen sharply — in that case, it’s the reverse:

• Results above expectations

• Guidance raised

• Macroeconomic factors

• Company-specific catalysts: an influential investor taking a stake, a major contract signing, a technological breakthrough

Next, we look at the bear thesis. It generally builds on the “why did the stock drop” elements, going one level deeper:

• Loss of market share to competitors.

• Operating margins under pressure (rising costs, falling selling prices).

• Excessive debt levels or insufficient cash (cash burn).

• An outdated or disrupted business model.

• Management changed strategy, and products no longer sell because they no longer address the right needs.

• Is this a structural problem or a conjunctural one?

In light of this, we must ask ourselves what evidence supports these fears, and whether they are substantiated:

• Analysis of financial statements (balance sheet, income statement),

• sector reports,

• Comparison with peers.

• Supplier and Customer Analysis

To take this line of thinking all the way through, ask yourself the following questions: What if the bear thesis is really true? What does that mean?

The idea is to quantify the impacts described above.

At the end of your argument, you should be able to identify clear criteria that allow you to conclude that the bearish thesis is valid. For example:

• Revenue growth of X% or less

• Margins under Y%

• Competitors’ market share exceeds Z%

Generally speaking, some of the arguments raised are true, but the company will be able to address them easily. Then put yourself in management’s shoes and ask yourself what options they have to remedy the situation. That is the whole point of the bullish thesis.

What specific actions could management take? They can generally:

• Launching new products or changing strategy,

• Start a price war (very bad in the short term),

• Take over a troublesome competitor,

• Focus on its core business by selling or divesting segments,

• Reduce costs.

Next, check management’s actions and communication

• Is management transparent about the difficulties and credible in its solutions? Does management hit its targets from one report to the next? Are they too optimistic?

• What actions has management planned to take? Every action in the plan should improve the fundamentals and restore investor confidence.

As with the bear thesis, you should be able to identify indicators that confirm the bull thesis. For example:

• Revenue growth above X%

• Margins above Y%

• The company’s market share above Z%

These actions need to produce concrete results that address the difficulties. So we look for catalysts, which are specific events that trigger a significant movement in a stock’s price, or in the market as a whole.

They come in several types:

1. Performance catalysts: the company beats expectations.

2. Market catalysts:

   -Index inclusion: which forces thousands of ETFs to now buy the stock.

   -Coverage initiation: when an analyst revises their target price

   -Short squeeze: an upward market move, or a move above a certain threshold, can force short sellers to urgently buy back their position.

3. Strategic catalysts:

• Buyout or merger: an acquisition offer from a major player.

• Spin-off: separating a business division to reveal the hidden value of a subsidiary, which then gets sold by funds and ETFs whose underlying holding, however interesting, no longer fits their mandate.

• Exclusive partnership: becoming the “preferred” supplier of a market leader.

4. Macroeconomic / regulatory catalysts:

• Interest rate pivot: any change in interest rates, particularly US Treasury yields, changes the yardstick against which all investments are compared.

• Changes in commodity prices.

• The end of a recession, or a price change affecting customers’ budgets.

• Regulatory framework changes.

The event happening is one thing, but remember that the market thinks in probabilities. The price adjusts toward the news as the catalyst becomes clearer and clearer — not at the moment it actually occurs.

I also note the blind spots in my research, so I can keep track of unresolved points that may have slipped through the analysis. It’s not possible to answer all of these questions exhaustively — otherwise investing would just be a matter of computing power. Investing requires acting on imperfect information: that means making a decision without knowing everything, but with enough information to act with a good level of confidence.

2. How much?

This section addresses the question of profitability, approached through two methods:

• Valuation, which consists of determining the company’s intrinsic value from its own future cash flows, independently of what the market thinks.

• Pricing, which consists of determining how much the market is willing to pay for those same flows, through a multiple.

I’m not a finance professor. So I’ll leave it up to you to decide if you’re interested in what Aswath Damodaran—who is one—has to say on the subject. He has plenty of free resources on his Substack, YouTube videos, and books that are excellent reads, particularly his book *The Little Book of Valuation*.

When it comes to valuation, the gold standard is the DCF method, which involves calculating a company’s future cash flows and discounting all of its future cash flows to the present to derive its intrinsic value. This value is independent of the market’s assessment of the company. It is, therefore, an intrinsic valuation method.

Personally, I believe that the information needed to accurately perform a DCF analysis (5- to 10-year growth rate, terminal value, discount rate) cannot be estimated with sufficient reliability for most companies. Having built plenty of projections as a project manager, most initial estimates turn out to be completely wrong — even more so the further out the date, or depending on the quality of your starting assumptions. And having made and seen estimates made, there’s a tendency to land on the number you wanted in the first place. The DCF creates an illusion of expertise based on mathematical and logical reasoning whose foundations are often uncertain.

For this model to be relevant, a suitable company must be predictable, which narrows the range of possibilities.

Pricing, on the other hand, involves valuing the company based on comparables. In this case, you believe that the market is generally reasonable but has misjudged a specific value. It is therefore a relative method, divided into equity multiples and firm multiples.

Equity multiples

PE ratio (price/earnings):

• Formula: stock price divided by earnings per share —

• Meaning: how much the market pays for one euro of annual profit. If a stock trades at 20 times earnings (a P/E of 20), you get back your money with the current earnings in 20 years.

• Comments: depends heavily on the company’s growth and risk: you cannot say based on this unique metric that it is cheap or expensive. PE ratio Sensitive to the same accounting distortions as net income covered in the previous article (one-off items, minority interests). Best cross-checked against P/FCFE below, and the PEG ratio.

PEG ratio (PE to growth):

• Formula: P/E divided by the expected earnings growth rate — corrects the raw P/E to compare different growth profiles.

• Meaning: A P/E of 30 with 30% growth gives a PEG of 1; the same P/E of 30 with only 10% growth gives a PEG of 3. Peter Lynch said that a good PEG ratio is when the growth is equal to the PE (ex: 30% growth EPS with a PE of 30).

• Comments: In the case of a cyclical company, the opposite is true. A company’s P/E ratio will drop at the end of a peak (due to investors’ expectations of a decline in the stock price) and will be extremely high at the trough of the cycle,

P/FCFE (price to free cash flow to equity):

• Formula: share price divided by free cash flow to equity per share.

• Meaning: how much the market pays for one euro of cash actually available to the shareholder.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

PBV (price to book value):

• Formula: share price divided by book value (equity) per share.

• Meaning: how much the market pays relative to what shareholders have contributed or left in the company, on the balance sheet.

• Comments: this was the signature formula of the famous investor Benjamin Graham. Since companies now have significant intangible assets (goodwill, brand, software), this key indicator of value investing is used much less frequently.

PS (price to sales):

• Formula: share price divided by revenue per share.

• Meaning: how much the market pays for one euro of sales —

• Comments: the only one of the five ratios that still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

Firm multiples

These take into account not just equity, but the full set of long-term resources available, namely equity and debt, minus net cash, to arrive at enterprise value. The advantage is being able to compare companies with different debt ratios by leveling this base.

EV/FCFF (value to free cash flow to firm)

• Formula: enterprise value divided by the cash available to all capital providers (debt and equity), before any debt service.

• Meaning: how much the market pays for one euro of cash generated by the company and available to all of its capital providers (shareholders and creditors), before any debt service.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

EV/EBIT

• Formula: enterprise value divided by operating income before interest and taxes

• Meaning: measures operating profitability independently of the financing structure (debt vs. equity) and of each country’s tax treatment.

• Comments: allows comparison of companies with very different debt levels without distorting the reading, unlike the PE ratio.

VS (value to sales)

• Formula: enterprise value divided by revenue: it is the firm-side equivalent of PS.

• Meaning: how much the market pays for €1 of sales.

• Comments: it still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

We look for a gap between what the company is worth (as described in the two theses section) and the price we pay for it, with the multiples shown above.

In practice, my method does not involve directly comparing a company to a basket of publicly traded competitors. I prefer to build a matrix of scenarios: estimating the company’s future earnings under various assumptions (bear/base/bull), then cross-referencing them with possible multiples. To make this simple and easy to understand for my readers, I use the P/E ratio after adjusting for non-recurring items.

The idea is to identify a range of possibilities using a pricing scorecard in this format. Then, based on the factors in the bull vs. bear analysis, to determine where my conviction lies.

The goal will be to monitor the company over time and verify that it is on track with my profitability assumptions.

Here’s an example I wrote in one of my articles as part of a deep dive into AppLovin.

So we’ll be looking for the valuation target a few years down the road, but in the short term, the stock price could react in an irrational way. I’ll break this down into two parts: fundamentals and investor sentiment.

The short-term volatility will prompt further reflection on investor sentiment, which will be the subject of another series of articles. For now, we are in the process of identifying three stocks as part of a pilot phase, as mentioned in the first article of the series.

That’s how I do my deep dives.

Ultimately, this is serious research that can take hours—or even days—of work. It’s the price you pay for an investment that you’ll be able to stick with over time, and that will help you avoid many mistakes and sleepless nights of doubt.

Final thoughts

In these three articles, we’ve seen the framework I use—and that I’m sharing with you—for selecting individual stocks. I develop investment cases whenever a stock seems like a great buy to me, based on a classification I outlined in another article. This method involves a detailed analysis, but this investment framework does not apply in every case. The next article will focus on how to identify companies on your own and how to screen them using an investment checklist to narrow down the field.

In addition, I invite you to check out the list of educational resources at the link below:

Subscribe now

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

This article was originally a single piece, but given its length, I decided to split it into three parts to make it easier to read and more educational.

The three articles will follow the format I use in my deep dives.

• This first one considered a business review.

• This article will cover the financial aspects, management analysis, and capital allocation

• Followed in the third part by an outlook based on bullish and bearish arguments and the company’s valuation.

Subscribe now

Here are the two first articles in case you missed it:

So we’ll wrap up our overview of the company—as a starting point—before moving on to the outlook in the next article.

Analyzing financial statements is, on the one hand, very straightforward, as one can focus on a few key indicators and obtain initial results that are both robust and compelling. This is also the area where finance professionals have the most data readily available and the greatest ability to interpret it using relevant analytical frameworks.

Gaining an advantage over them in this area is very complex and requires in-depth work.

In a future article, I’ll discuss how, despite the excellent candidates who choose a career in finance, individual investors have undeniable advantages. Stay tuned.

One of the key advantages of investing in the stock market is the equal access to information shared with all market participants—namely, public information. To form your own opinion about a company, you have access to the same documents at virtually the same time, and insiders who possess an informational advantage are required to disclose their stock purchases and sales. You’re therefore on a level playing field with other investors and can buy and sell shares in some of the world’s best companies, often for less than $1,000, with trading available nearly 40 hours a week.

So the battle is being fought in the financial documents, which we’ll look at right now.

The three financial statements

Any company listed on an index must follow a number of disclosure rules specific to its listing. In the United States, companies typically publish an annual report called a 10-K and quarterly reports called 10-Qs, which are available on the SEC’s website (the U.S. securities regulator) or on the companies’ own websites (under the “Investor Relations” section). In addition, companies hold earnings calls—presentations of their results that include a question-and-answer session with analysts—and transcripts of these calls are typically made available afterward.

For the rest of the world, the principle is generally the same. Keep in mind that some companies publish their results only in their own language, which makes them difficult for international investors to understand, or they publish their results on a semi-annual basis. This means that any bad news arrives several months later, which amplifies the market reaction, especially given the long-term outlook.

The three financial statements are the income statement, the balance sheet, and the cash flow statement. Accounting standards exist; the main ones are Generally Accepted Accounting Principles (GAAP) in the U.S. and International Financial Reporting Standards (IFRS) in the rest of the world. IFRS is based on GAAP, with some differences between the two.

I’m keeping this brief on purpose; there’s a lot to say about these topics—enough to fill years of study.

The Income Statement

The income statement is a report that shows how the company generated profit from its operations over a given period. It all starts with revenue, from which costs are subtracted to arrive at operating income—a numerical measure that indicates the extent to which the company is generating profit from its operations. After deducting financial and extraordinary items, we arrive at net income, which measures the amount of money available to shareholders.

The key items to look at are:

• Revenue

• Gross Margin and Operating Margin

• Net margin (if I have $1 in revenue, how much profit do I make?)

• Financial and Non-Recurring Items

• Net income

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

Depending on the business, some companies handle very high volumes with very low margins (e.g., retailers like Walmart or Aldi), while others handle low volumes with high margins (e.g., service or luxury companies). It all depends on the industry and the company’s competitive advantage. It doesn’t make sense to compare different industries directly.

Generally speaking, investors view an increase in margins as a sign of a stronger competitive advantage—and therefore as excellent news. This remains a general rule; the specifics should be examined on a case-by-case basis, depending on the context.

The Balance sheet

If the income statement is a movie, the balance sheet is a snapshot. It shows the company’s assets (and net worth) and how they are financed. The sharpest minds will have noticed that the balance sheet is… balanced: assets always equal liabilities.

A distinction is made between assets (items to be financed) and liabilities, which represent the source of financing.

These assets and liabilities can also be either current—with a useful life of less than one year—or noncurrent—with a useful life of more than one year.

This leaves us with four line items on the balance sheet, as shown in the image below:

The key components are primarily found in the fixed assets. Peter Lynch, the famous investor, has said that he considers current assets to balance each other out, so that only the fixed assets need be considered—whether purists like it or not.

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

The key items to look at are:

• Inventory levels

• Cash and cash equivalents

• The ratio of long-term debt to equity

• The number of shares

But if I had to choose just one, it would be the debt-to-equity ratio (= (long-term debt - cash and cash equivalents) / shareholders’ equity).

Peter Lynch also noted that a healthy debt-to-equity ratio could be as high as 50 percent. Beyond that, in the event of an economic downturn, the company would be exposed to a spiral of debt that could lead to bankruptcy or the dilution of existing shareholders.

You’ll notice that in the example, Booking has negative equity. This is the result of share buybacks carried out year after year. It’s not a problem—neither from an accounting nor a business perspective—and sometimes occurs among large-cap companies that have conducted a significant number of share buybacks.

Another key factor is the change in the number of shares. Most Quality companies will buy back shares, either to reduce the number of shares outstanding or to pay a dividend. Share buybacks offer several advantages:

• It is a sign of confidence in the future of management

• Fewer shares can cause the price to rise more easily (or fall). In 2021, Xavier Gabaix (Harvard) and Ralph Koijen (University of Chicago) published “In Search of the Origins of Financial Fluctuations : The Inelastic Markets Hypothesis” — one of the most consequential papers in modern finance. Their central finding : financial markets are far less elastic than classical theory assumes. In equity markets, $1 of net inflow moves total market capitalisation by approximately $5.

• The tax treatment of share buybacks (capital gains) is generally more favorable than that of dividends. And as long as you don’t sell, there is no tax.

Growth companies have much greater capital needs and typically issue new shares, a process known as dilution. If you’re diluted by 4%, that amounts to a 4% loss on your investment. However, these new funds will enable the company to grow—presumably by more than the amount of that dilution. This is a very strong implicit assumption in growth investing. It isn’t necessarily a bad calculation for the best companies, but dilution raises the bar that your investment must clear to achieve the expected return.

The Cash Flow Statement

This last document is very interesting because it shows us where the cash is going. The table starts with net income and breaks down cash flow into three categories:

• Operational Workflows

• Investment Flows

• Funding Flows

Similarly, here is another example from Booking in its 10-Q for the period ending June 30, 2026.

The key items to look at are:

• What is the difference between free cash flow (FCF) and net income?

• How many years of operating income would it take to pay off the debt?

• How many share buybacks or dividends are made?

• What are the amounts of stock-based compensation?

Based on the data in the financial statements, we calculate an extremely useful metric: free cash flow (FCF). It is calculated by subtracting capital expenditures (CapEx) from operating cash flow (Cash Flow from Operations).

It answers the question: “How much cash is actually left in the coffers to pay off the debt or pay dividends?”

FCF is a more accurate measure of a company’s ability to create value, unlike net income, which can be manipulated more easily through accounting.

It is necessary to identify the differences between the two.

Just as in a police investigation, reading one of the documents provides information, but it is only by cross-referencing all three documents that one can form a comprehensive picture of the financial situation. This statement can, in fact, be extended to our entire study of quantitative and qualitative factors.

All three documents contain numerous footnotes explaining how the data is calculated in cases where questions about accounting treatment may arise. They often include all sorts of subtleties intended to make the situation appear more favorable. The devil is in the details—in this case, the accounting details.

We mentioned Aswath Damodaran in the previous episode. Here is an overview of the key financial items and expected behavior based on the company’s life cycle for the three types of cash flows.

Profitability Ratios

Growth indicators are fairly straightforward: simply compare growth with recent fiscal years, focusing primarily on revenue, margins, and profit (FCF and net income). Profitability indicators are a bit more complex and warrant your attention when cross-referencing the data. In fact, market concerns often center on these points. Therefore, the ability to interpret these figures is essential.

Investment

Here is a non-exhaustive list of profitability metrics, starting with my favorite, ROIC.

ROIC (return on invested capital) :

• Formula: NOPAT (operating income after taxes) / invested capital (debt + equity, excluding excess cash)

• Purpose: It measures the return generated on the capital actually invested in the business—including debt and equity—but not cash.

• Meaning: If a company invests $1 through debt or equity, with a ROIC of 20%, its investment generates $0.20 in operating income after taxes (as long as the ROIC remains at that level). A ROIC higher than the WACC (weighted average cost of capital) is profitable.

• Comments: ROIC can be misleading for companies that engage in aggressive asset write-downs or share buybacks.

There is also a variant called ROCE.

ROCE (return on capital employed)

• Formula: EBIT (operating income before tax) / capital employed (equity + total debt). This includes any excess cash.

• Purpose: It measures the return generated for each euro of capital used.

• Meaning: If a company invests $1 in capital (debt + equity), with a ROCE of 20%, it generates $0.20 in operating income before taxes (as long as the ROCE remains at that level).

• Comments: Does not take into account non-operating cash flows (such as inventory value, which is important for oil and mining companies). Asset impairments automatically push ROCE higher. Misleading for companies with large amounts of cash.

ROE (return on equity) :

• Formula: net income / shareholders’ equity

• Purpose: Measures the return generated for the shareholder on the capital they have contributed,

• Meaning: If a shareholder invests $1, with a ROE of 20%, this generates €0.2 in profit for the company.

• Comments: It may be artificially inflated by high leverage or by low equity (aggressive—or even negative—share buybacks).

These three indicators should be analyzed in conjunction to assess the quality of the business and its management. It is helpful to compare these three metrics for the company with those of its competitors. Note that this is more difficult for companies with several completely different business lines, such as Amazon, which combines retail operations with data center operations.

There’s also ROA, which I don’t use very often:

ROA (Return on Assets) :

• Formula: net income / total assets

• Purpose: Partially corrects the bias in ROE by including debt in the denominator—less sensitive to leverage, more appropriate for comparing companies with different capital structures

• Meaning: If the company generates $0.20 in net income for every $1 of total assets, its ROA is 20%.

• Comments: This metric is less precise than ROIC/ROCE when measuring pure operational efficiency, since total assets also include non-operating assets (cash, equity investments) that ROIC specifically excludes. Furthermore, net income needs to be examined to determine whether it provides an accurate picture of reality.

Here is a summary of the four indicators:

Also note that it is necessary to evaluate investment opportunities and weigh them against profitability: To generate $1 million (in NOPAT), for example, one could:

• Invest $10 million at 10%,

• Invest $5 million at 20%,

• Invest $3 million at a 33% rate.

A company will be able to continue investing as long as its resources allow, depending on its market and the creativity of its management.

Net Margins

There are two key indicators for margins.

Net margin:

• Formula: net income / revenue

• Profit: what actually remains for shareholders from every dollar of revenue, after all expenses have been deducted,

• Meaning: If the company generates $1 in revenue with a net margin of 20%, $0.20 in net income remains for shareholders (as long as the net margin remains at that level),

• Notes: Distortion may occur if the company has subsidiaries in which it owns between 50% and 100% of the shares—in which case, minority interest must be adjusted.

FCF margin :

• Formula: free cash flow / revenue

• Usefulness: How much of every dollar in revenue actually remains as cash after capex is deducted,

• Meaning: If the company generates $1 in revenue with a 20% FCF margin, it converts $0.2 of that revenue into actual available cash (as long as the FCF margin remains at that level),

• Notes: There may be some distortions, particularly if a company sells subscription-based services: only the portion that has already been completed and billed is recognized, not the entire plan.

It is important to compare and analyze the differences between net income and free cash flow—and thus between their margins. This is a useful exercise to perform during your analysis to gain a thorough understanding of specific accounting practices.

A few other metrics that I don’t use:

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric omits too many important factors to provide an accurate picture of the business’s profitability. Charlie Munger had a famous remark on this subject:

Worse still, some companies prefer to report adjusted EBITDA.

A word of advice: Use the figures reported in accordance with accounting standards as your point of reference. Generally, those who present you with adjusted or non-GAAP figures do so to paint a rosier picture of reality—in other words, to make a sales pitch—rather than to tell the truth.

Every rule has its exception: I recently saw a presentation of results from Novo Nordisk that showed sales figures adjusted for two factors: one was a reversal of an accounting provision (a valid reason), and the other was due to an impairment charge related to discontinued drugs (a debatable reason). I’ll leave you with the image below, which pretty much sums up my opinion on the matter:

Here is a summary of the key profitability metrics:

3. Management

There is a fundamental problem between shareholders and managers: the manager seeks to line his own pockets with shareholders’ money instead of acting as a good steward. This has been theorized by several well-known authors.

The renowned Adam Smith had already pointed out in *The Wealth of Nations*:

The directors of such companies, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

In 1976, a seminal article by Michael Jensen and William Meckling (“Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics) defined agency theory, a famous milestone in the history of management.

They define the agency relationship as a contract under which the principal (the shareholder) delegates decision-making authority to an agent (the manager), and argue that if both parties seek to maximize their own utility, there are good reasons to believe that the agent will not always act in the principal’s best interest. It was this article that gave rise to the term “agency costs”—the cost of this conflict of interest.

The goal of this entire section will therefore be to answer the following questions:

• Who are these managers?

• Are they effective?

• Can I trust them with my money?

The order of the questions is designed for educational purposes. When analyzing actions, you will inevitably ask yourself all three questions at the same time.

To assess the management team, simply asking your favorite AI a question, reviewing the financial documents, and taking a look at LinkedIn should provide you with all the information you need.

Management Effectiveness

Based on my studies in management and my experience as a project management professional, the theoretical definition of a good manager is based on performance indicators and their ability to meet them. It is very difficult to distinguish a good manager from a favorable situation. This point is essential: a good manager is often considered as such because they are successful.

The challenge here will be to distinguish between economic conditions and the manager’s performance.

One way to do this is to examine the track record—that is, actual performance versus promises—and thus compare the set goals with the actual results using the financial statements from recent fiscal years.

The renowned Warren Buffett wrote in his 1979 letter to shareholders:

You’ll notice the characteristic AI style of “it’s A, not B”—nearly 50 years ahead of its time. A pioneer.

In practical terms, this quote means that you can significantly increase your profits by investing heavily, even with a low rate of return. It’s like saying that to double your savings, you can either double your existing capital through your investments or contribute the same amount from your savings.

True management competence is measured by the return on capital already invested.

Ideally, then, you’ll want: excellent management capable of generating very strong returns on invested capital, along with the reinvestment opportunities inherent in the business. Ideally, you’ll want plenty of both if you’re taking a long-term view.

Its management ability is measured by capital allocation, which varies depending on the stage of the life cycle:

• First and foremost, a company will finance its organic growth through items such as capital expenditures, R&D, and working capital needs. This is the best use of capital as long as the return on that reinvestment exceeds the cost of capital. As the company grows, these opportunities diminish over time. In economics, this is known as the law of diminishing returns.

• If there is capital remaining beyond what organic growth can absorb at a good rate of return, three options are available: external growth (M&A), dividends, or share buybacks. Be careful, though: external growth is generally a bad bet for shareholders. Personally, I prefer to avoid share buybacks, which are often based on overly optimistic assumptions and coincide with market highs.

• Management is expected to return to shareholders any funds that cannot be invested with a sufficient rate of return.

• If you invest in dividend-paying companies, check their ability to pay dividends during difficult times (COVID-19 in 2020, the Global Financial Crisis in 2008, etc.).

Also keep in mind that, in a young company, good management is the source of competitive advantage, and that advantage will grow over time. Poor management—or management grappling with structural challenges in its business—will see its competitive moat erode and, consequently, its profitability decline.

Trust

The best way to earn management’s trust is to make sure your interests are aligned with theirs.

Nassim Nicholas Taleb in his 2018 book, Skin in the Game: Hidden Asymmetries in Daily Life, describes a concept that has since been widely cited: “Skin in the Game.”

If the manager holds a significant—or even a majority—stake in the company where you’ve invested, your interests are aligned because he shares your goal: to drive up the stock price and thereby maximize your wealth.

We will therefore prioritize seeking out founding executives, who have the advantage of holding a significant stake in the company and possessing a long-term vision. The superior performance of owner-operators has been proven over the long term, due to the natural selection that occurs over time between founders who are excellent managers and those who stagnate or go bankrupt.

When it comes to CEOs who are not founders, it is important to review their compensation plan in particular: Is it in cash? In stock? What performance goals is it tied to?

By choosing a founder who runs the company, you stack the odds in your favor, but it doesn’t guarantee success. I experienced this firsthand as a counterexample when I invested in a promising Italian consulting firm. For several reasons, I sold my position two years ago, one month before the bombshell in September 2024: The press reported that the founder and CEO of Digital Value, Massimo Rossi—founder, CEO, and largest shareholder of Digital Value (an Italian IT company listed on the Milan Stock Exchange)—was arrested on October 16, 2024, for corruption and rigging public bids in the Sogei case (the IT company of the Italian Ministry of Economy). He resigned that same day, and the stock price plummeted during the trading session. In less than a month, the stock plummeted by 80%. It was delisted a few months ago.

The executive had previously been praised for his management skills and vision. This is just one example among many of the risks associated with portfolio concentration and what is known as company-specific risk.

Furthermore, a good place to assess management’s integrity is in the financial statements. I’ve previously discussed metrics that are adjusted to paint a rosier picture than usual, but management under pressure to deliver good numbers may be tempted to shift their perspective. To name a few examples, I’m thinking of recurring non-GAAP restatements from one quarter to the next, changes in accounting estimates (depreciation periods, provisions), aggressive revenue recognition, and “exceptional” expenses that occur too frequently to be truly exceptional.

The devil is in the details—in this case, accounting details.

Final thoughts

This section concludes the static analysis of the company and helps address some initial questions regarding the quality of the business and your desire to keep it in your portfolio.

The “Financials” section should allow you to cross-reference the information from the “Business” section, particularly with regard to competitive advantage. Management will indicate the quality of management: good management will strengthen its competitive advantage whenever possible. It is therefore an essential prerequisite for investment and the source of numerous risks.

The next step will be to look ahead, considering both bullish and bearish scenarios, and to estimate a target price based on the company’s possible futures.

Subscribe now

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

• Getting started

• Choosing your first ETF

• Stock Analysis

  • 1. The Business

  • 2. Financials and Management

  • 3. Outlooks

• How to find and track stocks to invest in

Portfolio: (in progress)

• Compounder vs Multibagger: The Ratchet Effect

• Good buy, great buy, screaming buy

This article was originally a single piece, but given its length, I decided to split it into three parts to make it easier to read and more educational.

The three articles will follow the format I use in my deep dives. This first one will consider a business review covering the products and services sold by the company, followed by an examination of the market structure and competitive advantage. This article will conclude with an assessment of the company’s life cycle and a review of market segments (such as quality, value, etc.).

The following articles will cover:

-In the second part: financial aspects, management analysis, and capital allocation

-Followed in the third part by an outlook based on bullish and bearish arguments and the company’s valuation.

Subscribe now

Here are the two first articles in case you missed it:

1. Introduction

The first question to ask is: “What does the company sell? What products and services does the company offer?”

This is the core of the study, around which all other responses will revolve. It is therefore necessary for you to review the various products and services and the markets in which they are sold. This requires you to know what market shares they hold.

Obviously, a company does not operate in a vacuum; it is necessary to identify its environment—that is, its customers, suppliers, and competitors.

• What are the company’s customers looking for in this product? How many are there? Do they purchase the product directly from the company or through a distributor? Does the company have a major customer that poses a risk?

• As for suppliers, who are they? Is there a critical dependency on any of them, or does any of them have pricing power?

• For competitors, we will seek to determine their market shares and their products.

Finally, at this stage, we can ask ourselves what ethical issues or risks the company faces. This is something I consider early enough in my research to rule out candidates who wouldn’t be a good fit for me.

Once you’ve taken this initial look at the big picture, the question to ask yourself comes back to the products: “Am I able to determine whether the company’s products or services are superior to those of the competition?”

That’s Peter Lynch’s famous “Invest in what you know.” If you can answer that question, great—you’re probably onto something. For example, in my own circle, I’ve noticed that the people I meet place a higher value on iPhones. That my kids, like everyone else, always prefer Coca-Cola to any other drink on earth. That if people had to keep just one streaming service, the majority would choose Netflix.

There are many excellent investment opportunities available to us as individual investors, and they do not require any special skills.

Conversely, if you are unable to determine whether the company outperforms its competitors based on anything other than the numbers, you will always have a hard time keeping your cool during a market downturn and forming a clear opinion about your investment.

A 2018 study by Hendrik Bessembinder titled “Do Stocks Outperform Treasury Bills?” indicates that, among stocks listed in the United States between 1926 and 2016 (approximately 25,300 securities), only about 4% of the securities accounted for all of the stock market’s net wealth creation over that period. The remaining 96% did no better than one-month Treasury bills (i.e., short-term U.S. bonds).

A follow-up study, expanded to include 62 countries over the period 1990–2020, found an even more concentrated result: 2.4% of the world’s publicly traded companies accounted for all $75.7 trillion in net stock market wealth creation during that period.

The takeaway from this point is that the stock market’s performance is driven by a very small number of winners and a myriad of losers. And it is these few companies that will be the gems of your portfolio.

These are companies that I refer to as “category definers,” because they have helped create a product category in which they dominate the competition—or better yet, have no competition at all.

This superiority stems in particular from the market structure and the differentiation these companies have succeeded in achieving in their market.

2. Market Structure

2.1 The Model of Pure and Perfect Competition

One of the first topics I studied as an undergraduate economics major was the model of pure and perfect competition, because it provides the framework within which many companies operate.

We’ll see why this model is the bane of shareholders. It has several characteristics:

The implication of these four points is that, in this model, firms’ long-run profits tend toward zero, because any profit will attract competitors. Increased competition will drive prices down until producers go out of business, thereby restoring the equilibrium price. The price is therefore equal to the marginal cost (the cost of producing one additional unit), and the return on invested capital (ROIC) is equal to the WACC (the cost of capital).

Agricultural commodities such as bulk coffee, corn, wheat, and soybeans come close to this model: there are thousands of producers selling the same product in a market where anyone in the right climate can start growing that crop, and where price information is available on international markets. The foreign exchange (forex) market is also similar.

Every company will obviously seek to break free from this model, with varying degrees of success depending on the “imperfections” present in its market—which are referred to by the academic term “competitive advantage.” The most famous investor of all, Warren Buffett, coined the term moat to describe this concept, and it is now commonly used in the financial world. It is precisely because it is possible to break away from this model that individual investing makes sense.

Before examining the specific mechanism that enables this escape (the “moat,” discussed in more detail below), it is helpful to first determine where the company falls on the spectrum of market structures.

2.2 Market Structure: From Monopoly to Niche

On one end of the spectrum is the model of pure and perfect competition, and on the other end is the monopoly, which poses societal challenges. In between, there are several gradients worth exploring:

• Monopoly : A single firm serves the market. Since users cannot find alternatives to the firm’s products and services, the firm’s bargaining power is disproportionate. The regulator typically seeks to regulate or break up this monopoly, or to turn it into a public utility. Monopolies often exist in the form of public utilities (Con Edison in New York, PG&E in California, and airports when there is only one at the local level, such as in Zurich or Florence). Often, this type of market is maintained when there is no practical reason to allow competition to enter.

• Duopoly : Two dominant players share most of the market—for example, Visa and Mastercard in payment networks, or Airbus and Boeing in long-haul aircraft. They manage to coexist because neither has any interest in triggering a price war that would hurt both of them equally. This type of market is often very profitable for shareholders, and it is easy to track the market by following the two leading companies.

• Oligopoly: A handful of players (usually 3 to 5) share a market with high barriers to entry—competition may be divided into market segments allocated to each player. The goal is always to avoid a price war, which would be costly for all players. It is also possible for all players to agree on a market price; this is known as a cartel. Such an agreement tends to draw the ire of regulators.

• Niche market: a market that is too small, too specialized, or not glamorous enough to attract serious competitors—there’s no need for a legal monopoly or a patent; the market’s size or specialization itself acts as a barrier (no one bothers to enter a market whose potential is considered too limited)

• Pure and perfect competition: no firm makes a profit.

The general rule to remember is that the best competition is no competition at all, or as little as possible.

This classification provides a useful overview of the market and its existing players. We must now examine the reasons why new players cannot enter this market—that is, the company’s competitive advantage.

2.3 Competitive Advantage (Moat)

This article is not intended to be exhaustive on every point, so I will outline the main moats you should know about:

• Switching costs: switching costs — it’s expensive or a hassle to leave,

• Network effects: The product becomes more useful as more people use it

• Brand: Customers pay more for the same product because of the name

• Economies of scale: The largest product is structurally less expensive than the others because fixed costs are spread out

• The difficulty of replicating a product

• Regulatory or intangible assets: licenses, patents, rare permits.

Often, the best companies have multiple competitive advantages that grow stronger over time

On the other hand, keep in mind that what can reshuffle the deck within the market is technological change, which is a double-edged sword: it can help established companies solidify their position—or work against them.

Let’s take Coca-Cola as an example. Consumers place a higher value on Coca-Cola by choosing it over a cheaper alternative. Decades of advertising and history have linked it, in the minds of consumers, to sporting events, sharing, and a polar bear. Behind this beverage lies the entire world of American soft power.

Yes, the product can be replicated by any chemist, but the name and visual identity remain protected by a trademark.

In terms of the costs of change, Coca-Cola has locked out the competition with distribution contracts that are unbeatable due to the volumes sold. At the local takeout restaurant, there’s often a Coca-Cola fridge. Doing without it would mean replacing the fridge (which is certainly sold at a competitive price), and doing without Coca-Cola products would mean cutting back on one of its easy sources of high-margin revenue. If you leave Western countries, your choices for non-alcoholic beverages will often be limited to water, local sodas, or products from the Coca-Cola lineup. The latter are therefore, by nature, much more competitive.

Competitors’ products can threaten the company through e-commerce, reaching consumers directly without going through a century-old distribution network. However, Coca-Cola can still try to acquire the most promising startups early in their development, before regulators block the merger to maintain competition in the market.

Warren Buffet a eu la phrase célèbre: “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”

It is important to note that a moat is built over time and that, by its very nature, a new company will not have one. Everything rests on the pillars of superior products and services and high-quality management.

3. Life Cycle and Framework for Analyzing the Initiative

3.1 The Life Cycle of a Business

A company can be viewed in an organic way, as having a life cycle: it starts small with a product or service, then grows and develops a business model that becomes increasingly efficient, enabling sustained growth over time. The business, which initially operates at a loss, eventually manages to turn a profit and sustain that profit over the long term. Growth is strong at first because the company is starting from a small base, then slows over time until it stabilizes. Finally, the decline phase begins, which can occur more or less rapidly depending on the nature of the business.

Aswath Damodaran, professor of corporate finance and valuation at New York University’s Stern School of Business, offers excellent resources, particularly on the corporate life cycle. The images below are taken from one of his articles:

Depending on your experience and investor profile, you will likely develop preferences for certain investment life cycles, styles, or factors.

3.2 Investment Styles

We often hear about Quality, Value, and Growth stocks, and we can explain what these terms mean based on the framework outlined above.

• Growth: targets the Young Growth and High Growth stages—the investment is based on the company’s future trajectory, expected revenue, and profits.

• Quality: Targets companies in the High Growth or Mature Growth stages. The company is well-established, as are its competitors; it has one or more moats and is poised for significant future growth.

• Dividend: This strategy targets the Mature, Stable, and Decline stages, where the company generates cash but lacks opportunities for reinvestment. It chooses to return this cash to shareholders in the form of dividends or share buybacks. This category notably includes so-called “cannibal” companies, as their stock price is driven upward primarily by share buybacks.

• Value: Does not target a specific stage but rather a discrepancy between price and value, regardless of the stage. A company can be classified as a “value” stock at any stage of its life cycle. Generally, there is an underlying issue, or the market perceives it that way.

This is a simplified explanation: when you look at the details, a company may share characteristics of several different investment styles. Similarly, there are several investment styles, and they can coexist within the same market.

Beginner investors tend to turn to dividend-paying stocks for their safety and the almost magical appeal of receiving regular dividends. However, the lack of business growth and opportunities for reinvestment often leads to low returns that underperform the benchmark index.

They will also tend to gravitate toward value stocks, thinking they’re getting a good deal (“Company X has a P/E ratio of 5, while its competitors have a P/E ratio of 15—I’m getting a great deal”). In most cases, the reason is valid and stems primarily from issues related to the company’s business or future prospects.

Growth stocks are also very popular because, even though most of them will underperform the index and carry risk, a handful of winners offer the prospect of multiplying your investment in just a few years.

Ultimately, quality stocks will offer the best risk-return ratio due to their competitive moat and long-term growth prospects. As a result, they often command higher prices than other stocks. As with value stocks, the right time to invest is when the company appears (the word “appears” is important) to be facing temporary difficulties.

For educational purposes, I believe the best choice of three stocks to start with is “quality” stocks, given their long-term potential, financial stability, and competitive advantage.

Due to data quality limitations, I can provide a performance breakdown covering the past 15 years, but not beyond that. We have been in a nearly continuous bull market since then, with the exception of dips in 2018, 2020, and 2022.

3.3 Investment Factors

Investment styles can be cross-referenced with factors, which incorporate this classification and add several points:

• Size (small-cap stocks have historically outperformed large-cap stocks over the long term). Stocks are classified as small-cap when their market capitalization is between $300 million and $2 billion, mid-cap between 2 and 10 billion, and large-cap above that.

• Momentum (stocks that have performed well over the past 3 to 12 months tend to continue doing so in the short term). This reflects a well-known investor bias: investors tend to buy what’s rising and sell what’s falling.

• Low volatility (the least volatile stocks offer a surprisingly good risk-return profile, contrary to intuition),

Final thoughts

We have seen the forces at work that underpin a company’s growth and profits: products and services, market structure, competitive advantage, life cycle, and investment styles and factors. As you have learned, the best competition is to have no competition—or as little as possible.

Aswath Damodaran wrote, “A good valuation is a bridge between stories and numbers.” We will therefore move back and forth between the qualitative aspect—part of which we have already presented—and the quantitative aspect.

The following article will cover the company’s financials and management. By cross-referencing the data from the first and second articles, we will provide an overview of the company’s current situation, before exploring its future in a third article.

Subscribe now

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

We mentioned in the previous article that buying a large ETF offers the best balance between returns and time spent, especially for a beginner investor. Whether you’re just starting out or building a portfolio, it’s often a very good choice and the benchmark for any investment in individual stocks. We’ll explore a few questions about how they work, which indexes they track, how to distinguish between different ETFs, their alignment with ethical criteria, the difference between broad-market and thematic ETFs, and finally, a practical example of how I would select an S&P 500 ETF if I had to choose one from the list available in one of my investment wrappers.

Subscribe now

Here is the previous article in case you missed it:

1. How does an ETF actually work?

An ETF, which stands for Exchange-Traded Fund, is a basket of securities weighted according to a defined formula. It trades continuously on the stock exchange, just like a stock. It can be bought and sold through a brokerage account.

If a stock rises within the index, the ETF automatically purchases shares to maintain the new weighting. Similarly, if a stock falls, its weighting decreases. Purchases and sales are executed automatically via an algorithm.

Indexes are also periodically rebalanced and reconstituted—quarterly or annually, depending on the index. Companies that no longer meet the criteria (size, liquidity, sector) are excluded; new ones are added automatically. This allows the portfolio to be automatically updated for the best indexes and to stay current with trends.

There are generally two types of ETFs tracking the same index:

• Market-cap-weighted ETFs: winners automatically gain a larger weight simply because their price rises — no buying required — which drives concentration toward top performers over time.

• Equal-weight ETFs: By definition, they avoid concentration by selling when prices rise and buying when they fall.

They are created by issuers such as Amundi, Vanguard, or Blackrock (via iShares).

But what happens if the issuer goes bankrupt?

An ETF is a fund and is generally structured as a separate legal entity. Its underlying assets are not on the asset manager’s balance sheet.

Thus, the issuer’s bankruptcy does not result in a loss of value for the securities held by the fund.

In practice, the real risk scenario is the liquidation or closure of the fund (see the “assets under management” criterion below).

2. Two Categories of ETFs

ETFs can be divided into two categories, each with different objectives:

• Broad-market ETFs that track major indexes, such as the S&P 500, MSCI World, STOXX 600, and Nasdaq 100. We’ll discuss them in more detail in the next section.

• Thematic ETFs are tactical bets on a specific sector or technology: semiconductors, artificial intelligence, blockchain/cryptocurrencies, water, green energy, etc.

The arguments in favor of broad-market ETFs: built-in diversification, a track record of performance, and they also benefit from the rebalancing mechanism discussed in Section 1: new stocks are added, while underperforming ones are removed.

The limitation of thematic ETFs: they generally appear only after the trend is already well established. Issuers launch the product after observing growing enthusiasm, which structurally puts them behind the curve. An ETF focused on semiconductors or blockchain launched after the underlying asset has already experienced a sharp rise is a good example: the product arrives just as the news has already been priced in.

Broad-market ETFs are excellent for the core of a portfolio. It’s best to view thematic ETFs as a deliberate tactical play on the sidelines of a portfolio (and therefore with a smaller allocation), and focus on a broad-market ETF to start with.

3. The major indexes

Most ETFs track major stock market indexes. Buying them amounts to making a bet—often an implicit one—that we’ll try to explain here.

S&P 500: 500 large U.S. companies, weighted by free-float market capitalization. This means there are approximately 500 companies, but the ~10 largest account for a disproportionate share of the total weight. Average return: ~10% per year since 1957 (S&P Dow Jones Indices, via Fidelity). Annualized volatility: ~20.1% over 2007–2025 (Nasdaq, Nasdaq-100 vs. S&P 500 comparison, Q4 2025).

Nasdaq 100: The 100 largest non-financial companies listed on the Nasdaq. Heavily weighted toward tech and growth—not a general “U.S. large-cap” index. Average return: 14.25% per year since its launch in 1985 (Nasdaq, 40th-anniversary press release, January 31, 2025). Annualized volatility: ~22.9% over 2007–2025 (same source). Higher returns come with higher volatility—there’s no such thing as a free ride.

Investing in these indexes implicitly means placing the U.S. at the center of the global economic system and keeping it in first place. In other words, it means the continuation of the current Pax Americana. After all, this is not just about U.S. profits, but about the profits of American companies around the world. If U.S. companies lose global market share, the profits of S&P 500 / Nasdaq 100 companies decline, and this affects the index.

STOXX 600: 600 European companies of all sizes—large-, mid-, and small-cap. Offers intra-European geographic diversification, with sectors that are more cyclical and industrial than in the United States. Average return: 10.7% per year over 5 years. Annualized volatility: 14.2% over 5 years (official STOXX fact sheet, data as of July 31, 2026).

Investing in the European Union offers a means of sectoral and geographic diversification relative to the United States. The expected return depends on the role the Union will play in the coming years.

MSCI World: approximately 1,500 stocks in developed markets (~23 countries). In practice, the index is weighted at ~70% toward the United States, so it is less “global” than its name suggests. Average return: 13.29% per year over 10 years. Annualized volatility: 14.85% over 10 years (official MSCI fact sheet, data as of July 31, 2026).

This index, based on its name, seems like a consensus choice, but its 70% weighting in U.S. stocks makes it a bet that hinges primarily on the health of the U.S. economy.

A note on “world” indexes: The MSCI World excludes emerging markets—China, India, Brazil, among others. The MSCI ACWI (All Country World Index) includes them. The term “world index” therefore does not have a single meaning—check the composition before buying into the name.

Where to start with your first ETF: The S&P 500 is a good place to begin for educational purposes. It is the most widely discussed and best-documented index available—with a long history of data, consistent coverage by the financial press, and comparisons that are easy to find. Its composition is also relatively easy to understand: 500 major U.S. companies that most people are already familiar with.

4. Criteria for comparing ETFs based on the same index

Once an index has been selected, several competing ETFs track it—the factors that make a difference over the long term:

• TER (Total Expense Ratio): annual fees deducted from the portfolio’s value; even a difference of 0.1% to 0.2% per year, when compounded over the long term, will make a difference. Beginner investors tend to focus on fees. Don’t forget the rule: performance is shown net of fees and taxes. Fees are a minor issue. Spend two hours researching ETF and fund fees, but don’t make them your main concern.

• Assets Under Management (AUM): An ETF with low assets under management (<50–100 million euros) faces a risk of fund closure or liquidation (forced arbitrage, exit fees, tax mismatch)—assets under management are also a proxy for market confidence.

• Trading volume and bid-ask spread: market liquidity (different from outstanding shares) → an ETF with low trading volume can be expensive to buy or sell, even with a low expense ratio

• Replication:

  • Physical (actual purchase of the underlying securities) : the ETF owns real parts of businesses.

  • Synthetic: the ETF enters into a swap with a bank counterparty. The mechanics are technical, but the actual risk is generally limited.

  • Impact on tracking error (the difference between the ETF’s performance and that of the actual index)

• Distributing vs. accumulating: A distributing ETF pays dividends in cash (which you must reinvest yourself and which are taxed upon receipt, depending on the jurisdiction); an accumulating ETF automatically reinvests them in the fund (no dividend cash flow to manage, and taxation deferred until sale, depending on tax laws). Generally, an accumulating ETF is more advantageous from a tax management perspective. You can always sell a portion of your accumulating ETF’s shares yourself to recreate a dividend-like cash flow if you need one.

• Domicile: the country where the fund itself is registered (not the investor’s country of residence, nor the exchange where the ETF is listed)—an ETF domiciled in Ireland and an ETF domiciled in Luxembourg can both track the S&P 500, be listed on Euronext Paris, and be accessible to the same French or foreign investor; Why this still matters: Before receiving a dividend from a U.S. company, the fund is subject to a withholding tax levied by the U.S. tax authorities, and the rate of this withholding depends on the tax treaty between the United States and the fund’s country of domicile—not between the United States and the investor’s country; For example, the U.S.-Ireland tax treaty has historically been more favorable than others, which explains why the vast majority of U.S. equity ETFs available in Europe are domiciled in Ireland.

• Listing currency vs. underlying currency: An ETF listed in euros that tracks a U.S. index does not eliminate currency risk—you are still exposed to currency fluctuations, and a 10% decline in the dollar results in a 10% decline in the ETF.

• Currency hedging: a criterion distinct from the previous one—an “EUR Hedged” ETF actively offsets (using derivatives) the impact of EUR/USD fluctuations on performance, unlike an unhedged ETF, which is fully exposed to this currency risk in addition to the index’s performance; Hedging comes at a cost (included in the expense ratio or charged separately, depending on the fund) and is neither good nor bad in and of itself—it depends on whether the investor wants to isolate the index’s pure performance or accept exposure to the dollar as an additional form of diversification. For example, hedging an S&P 500 investment against your home currency amounts to choosing protection against a decline in the dollar as well as protection against an appreciation of your home currency.

• Ethics: This aspect is specific to each investor and involves selection or exclusion criteria that should be examined. You’ll often find ESG (Environment, Social, Governance) criteria and for France, ISR (Socially Responsible Investing)—which frequently exclude weapons, tobacco, and fossil fuels. Funds may also select the “best-in-class” investments in their category, which has led me to question the appropriateness of those choices. The best approach is to look up the ethical definition within the index the fund tracks to fully understand what you’re buying and to review the fund’s top holdings. It should be noted that, on the one hand, “ethical” ETFs often underperform their conventional counterparts, and, on the other hand, “ethics washing” is a fairly common occurrence in this category.

5. An example, please!

OK, so I asked you to find a first ETF, but now you are stuck in a list of ETFs in your investment wrapper with a headache. “Which one am I supposed to choose between the 10 suggestions I got?” Let me give you an example of how I would search.

I typed “SP500” into the search bar on my life insurance website and found the following 7 results, compiled in a table:

It’s worth noting right away that six of the seven are market-cap-weighted ETFs, as opposed to the seventh, which is an equal-weight ETF—representing a different investment strategy.

The first two on the list, from Amundi, are virtually identical in terms of fees but differ in terms of assets under management and dividend policy. I think that, given assets of this size—over a billion—I don’t see a problem, so both pass the test. Personally, I have a long-term investment horizon, so I’d prefer the Acc. However, French life insurance policies automatically reinvest dividends, so they’re practically equal. Between the two, I’d therefore choose the cheaper one in theory, even though the result after several years will be virtually the same.

The third is a distribution-oriented, hedged fund, which is potentially a positive if you want to reduce your exposure to the dollar. I don’t have a strong opinion on this at the moment, and logic would suggest hedging at the top of the market. The EUR/USD chart below shows that the right time was from 2002 to 2008, and that the timing was poor between 2008 and 2015. This is very clear to see on a long-term retrospective chart, but it’s very difficult to answer this question for the years ahead. Especially since in 2008, conditions were not favorable for the stock market…

The fourth fund, “Amundi S&P 500 EUR Acc,” is identical to the first one, but has higher fees. It is therefore less attractive. This is an older version; Amundi has lowered its fees over time, and the first fund appears to be the new product line. We can therefore expect further fee reductions in the coming years for smaller ETFs.

The 5th option is eligible for a France-specific investment wrapper (a tax-deferred account with lower taxes). This is not relevant here, and it is less attractive in terms of fees than the first option.

The 6th Amundi PEA S&P 500 Screened is hedged, PEA-eligible, and has higher fees. So, aside from the ESG component, it’s a less competitive product than the first one. The assets under management are a bit low, but that’s often the case with ESG ETFs. It’s more of a risk than a red flag. To find out what the ESG component consists of, visit the issuer’s website and open the KID, which indicates that it tracks the “S&P 500 ESG+ Index.” The rest of the research takes place on the Standard & Poor’s website, as they are responsible for the index.

The starting point is the traditional S&P 500 universe, but limited to companies for which S&P has greenhouse gas emissions data (via Trucost) from within the last five years.

The following are also excluded: companies that derive a significant portion of their revenue from coal (≥1%), oil (≥10%), natural gas (≥50%), or fossil fuel-based electricity generation (≥50%); controversial weapons, small arms, military equipment in the broad sense, tobacco, alcohol, and gambling; as well as companies deemed non-compliant with the United Nations Global Compact or embroiled in serious ESG controversies.

The last one on the list is an equally weighted ETF: This is more the exception than the rule. It overweights small-cap stocks and undervalued stocks, and underweights growth stocks. It underperformed during the dot-com bubble (the pro-tech and growth phase), and has underperformed since 2015. It outperformed by nearly 1.5% per year from 2003 to 2022.

A cap-weighted portfolio is an implicit bet on the continued leadership of the largest growth stocks, while an equal-weight portfolio is a bet on diversification and a return to the mean.

It helps avoid sharp declines resulting from significant market concentration, while still benefiting from rising markets. Currently, ten stocks account for nearly 40% of the S&P 500, which means that this index is, in part, a bet on AI.

In conclusion, based on my preferences, I would choose either:

• Amundi Core S&P 500 Acc: The Most Cost-Efficient Option, and a Bet on Continued Market Gains

• Amundi S&P 500 EUR Hedged Dist: a bet on continued market gains and a weaker dollar / a stronger euro

• Amundi PEA S&P 500 Screened: Striving for a Balance Between Performance and Ethics

• iShares S&P 500 Equal Weight Acc: a bet on continued market gains with partial protection against downside risk (whereas in the first fund, the top ten stocks account for 40% of the index, here they account for only 10/500 = 2%).

However, these considerations apply to an established portfolio, with variations that reflect market conditions. In the hypothetical scenario of holding an ETF for one year to get used to market volatility—using about 1% of your target capital—the first choice, Amundi Core S&P 500 Acc, is the most appropriate solution; or, if you have specific ethical preferences, ETF No. 6 (Amundi PEA S&P 500 Screened).

Now that you’ve placed your purchase order, let’s consider some possible scenarios for the next year:

• The market will rise by 10% or more,

• The market will move sideways, with a range between -10% and 10%.

• The market will fall by 10% or more.

All of this is accompanied by significant volatility, driven by investor sentiment, macroeconomic news (inflation, war, or the risk of war), or expectations regarding AI, in particular.

• If the market is rising: great—you’ll have made a small profit, having learned to navigate volatility.

• If the market remains flat: you will have learned to familiarize yourself with the world of the stock market.

• If the market declines: since you have a long-term perspective, you benefit from having already invested a portion of your capital, having lived a market downturn, and securing a better purchase price for the rest of your allocation that you have yet to invest.

So what’s next?

We will see the basics of the other school of investment in publicly traded markets, namely the selection of individual stocks. This one is my favorite and where you will get the most content from my Substack.

Subscribe now

Note on AI use: There isn’t 41% AI in my text—it’s more like 25%, written on a content which I find satisfactory. The difference between our two figures is due to the DeepL translation combined with errors in Pangram, from an original text in French. Pangram penalizes authors for whom English is not their native language.

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

1. Why Invest?

One might already ask: Why take the time to invest? Because of inflation.

The 20th-century British economist John Maynard Keynes witnessed the shift toward an inflationary regime following World War I, which gave rise to two types of actors:

• The losers: Holders of currency and bonds, whose capital is eroded by inflation.

• The winners: Entrepreneurs and investors who have invested in real assets and inventories of goods, because the nominal value of their holdings automatically keeps pace with—or exceeds—rising prices, while the real cost of their past debts decreases with inflation.

2. Types of Investments

What exactly are these asset classes?

-Real estate: You buy a property for yourself or one that generates a return (rental income) known in advance and expected to rise in line with inflation.

-Credit: This refers to a loan with a defined term and terms and conditions established in advance. The gains and losses are known to all parties. This category generally includes bonds, fixed-income securities, savings accounts, and private debt.

-Equity: We are investing in a business whose profits are uncertain and more or less difficult to predict. This category typically includes companies, whether publicly traded or not. Due to the uncertainty of the business, the investor will demand a risk premium to justify the investment, which can be understood in terms of the following question: “Why invest in a company and take the risk of a loss when I can make a risk-free investment yielding 4%?” The maximum loss is 100%, and the maximum gain is potentially “unlimited”.

-Commodities: Prices depend on supply and demand within a production process and, therefore, on the global economic climate, as well as on the level of speculation in this area.

-Store of value: Gold, Bitcoin, etc.: Their value depends on the market’s assessment of their worth and is therefore also subject to significant fluctuations. Gold has generated a long-term return of approximately 8% per year since the 1970s.

3. Within the “Equity” category

Investing in one or more companies can take various forms:

• Public markets: A company goes public to raise capital and provide liquidity. This gives investors the undeniable advantage of being able to sell their shares at virtually any time.

• Private Equity: investment in unlisted companies—illiquid and with limited information available. The average return is generally higher than that of the public market, with capital typically locked up for 10 years.

• ETFs: Exchange-Traded Funds (ETFs) are portfolios of stocks grouped according to a common theme: the S&P 500, MSCI World, STOXX 600, Nasdaq 100, or a more specific theme (semiconductors, water, green energy, automotive, ethically-driven indices, etc.).

• Investment funds: A fund manager collects money from investors and invests it according to a defined strategy in listed or unlisted markets. The manager is compensated through management fees (often 1–2% per year).

Moving forward, we will focus on ETFs and the market for individual stocks. Due to liquidity concerns and a lack of transparency regarding positions, private equity is not an asset class in which I wish to invest. As for managed funds, the high management fees and lack of transparency also deter me from investing in them.

A portfolio made up of ETFs can contain anywhere from one to about ten holdings. Some investors will be comfortable holding just a single MSCI World or S&P 500 ETF. Some will want to focus on specific bets, requiring a portfolio with more lines. If you track an index, you naturally achieve its return, which generally ranges from 6% to 14% per year on the long-term. Monitoring ETFs is very time-efficient and will take you only a few hours a year. In my opinion, this offers the best time-to-return ratio and is even ideal if you have only a limited interest in investing. On the other hand, since ETFs operate at a fairly high level, calculating the impact of various risks is a much more difficult exercise than it is for individual stocks: for example, answering the following question is, in my opinion, beyond the reach of an individual investor: “In the event of an oil shock or a rate hike, what would be the impact on the S&P 500 index?”

A portfolio composed of individual stocks will generally contain between 10 and 25 holdings, and its performance will vary greatly depending on the investor’s luck and skill. It requires significantly more time—at least one hour per week, if not several hours each week. The most complex part occurs before the purchase, when selecting the portfolio’s holdings; once that’s done, monitoring the portfolio is much simpler. Stock picking requires curiosity and a keen interest in the subject; those who engage in it are often enthusiasts. Whereas ETFs operate at a high level of abstraction, stock picking is grounded in reality through the selection of companies based on an investment thesis. In my view, it’s easier to tailor your portfolio to your available time, investment style, and convictions.

The table below summarizes the differences between ETFs and individual stocks:

4. Building Your Target Asset Allocation

In the stock market, expected returns are not linear. Those who invested in the S&P 500 at the top of the Internet Bublle took 11 years to break even. Yes, you went in positive territory from 2006 to 2008, only to experience the Great Financial Crisis.

Similarly, those who invested in Japan in 1990 took 34 years to recover their losses.

Money invested in the stock market is tied up for the long term, generally for at least 5 or 10 years. That is why it is recommended to have funds available to meet short- and medium-term needs. This step, in particular, should be adapted to your specific needs.

1. The first step is to set aside 3–6 months’ worth of expenses for unexpected events, usually in a savings account.

2. Next, you should calculate your needs for various projects over a time horizon of less than 5–10 years:

• A real estate reserve (for a loan, a reserve for renovations, etc.)

• Special events (leisure, work, life milestones such as wedding or moving expenses)

• If you are 45 or older and have children, estate planning is an issue that deserves careful consideration and should be integrated into your investment strategy.

3. With the remaining part, define long-term capital allocation from among the following:

• Fixed income (calculated based on your needs as indicated above)

• Real Estate

• Equities (ETF, Individual stocks)

• Other Asset Classes

The longer the investment horizon, the more the portfolio can be invested in stocks.

If you are 20 years old, your time horizon is potentially 50–70 years. If you are 60 years old, your time horizon is potentially 10–30 years, and you may want greater capital protection in light of your estate planning or future needs.

This question is difficult to answer at this stage and may need to be refined over time. The idea here is to get started and explore this question in greater depth later on.

5. Choosing Your Investment Wrappers

Unless you’re an individual living in Switzerland or Luxembourg—or some other lucky person in a similar situation with a 0% tax rate—your investment decisions will need to be weighed against your tax situation. In financial theory, optimizing your tax rate is just one of many ways to maximize your return (despite all the implications this may have for our societies).

There are many online resources for finding investment wrappers in your country. Start by searching online, and also ask your banker what options he can offer you.

To give you an example and to illustrate my point, I have three investment wrappers available for a French individual:

-A Plan d’Epargne en Action (PEA = Stock Savings Plan) that allows you to hold French and European Union stocks, with a tax rate of 18.6%.You need to wait for 5 years before unlocking the capital, but it is possible to switch investments within the account (e.g., sell Novo Nordisk to buy Interparfums) without incurring taxes, paying only the applicable buy and sell fees.

-A French “assurance-vie” (life insurance account) that allows me to hold approximately 1,000 individual stocks and which I use to hold shares in companies such as Microsoft, Booking, etc. The management fee is 0.5% per year, and when I want to sell shares to take profits, the insurer processes the transaction within 2 to 3 business days and takes a fee of 0.1%. Withdrawals from the wrapper are taxed at 24.7% after 8 years, 31.4% before.

A Compte Titres Ordinaire (standard securities account) with Interactive Brokers that lets you hold everything, with no custody fees and a 31.4% capital gains tax rate when you sell. Less useful for compounding, but it gives you access to some excellent investments.

Having multiple investment accounts sometimes creates a problem when I want to switch from one account to another, because withdrawing funds from my PEA or life insurance policy results in tax implications that I’d rather avoid.

6. Calculate Your Net Return

Let’s look at an example of how to calculate net return based on my three investment vehicles and their applicable fees and taxes, using the purchase and resale of a stock. Suppose that in two years, I’ve doubled my investment, for a return of 100%.

I can invest in this stock using all three of my investment wrappers, but the results will vary depending on my choice.

There is a significant difference between the CTO and the other investment wrappers due to the capital gains tax on the CTO upon resale.

Here is a general rule: Performance is shown net of fees and net of taxes.

On my Substack, all the calculations provided are shown before fees and taxes so that you can adjust them to fit your specific situation.

7. Conduct a pilot test

Investing is a major time and emotional commitment. I started investing in 2023 by transferring a six-figure sum directly. Even though it ultimately turned out well, mentally, it was a nightmare, and I wouldn’t wish it on anyone. Looking back, I think it’s a practice that needs to be tested, and for which I suggest three phases:

1. Learning Phase and First Practice Session

2. Transition phase toward a target portfolio

3. Maturity phase for its target portfolio

1. Learning Phase and First Practice Session

When you first start investing, that’s when you’re most likely to make mistakes that can cost you a lot of money and take a long time to recover from. There’s no “rookie discount” if you lose 50% on a stock just because it’s your first investment.

The goal of this phase is to reduce the risk of capital loss and to understand how markets and companies operate. It is primarily a training exercise.

This will also help you determine whether the subject interests you enough to move toward stock picking and whether you have the stomach to handle the volatility inherent in the stock market. At any moment, you might open your portfolio and see a 30% or 50% loss on one or more positions. Furthermore, watching a stock’s slow decline from its highs to its lows is a real emotional challenge.

The idea is to spend the first year with a portion of your investment capital in the stock market—in an ETF and a few stocks—say, three, if I had to give a number. Some people use “paper trading” (that is, they pretend to invest in a mock portfolio), but in my opinion, nothing beats the emotional involvement that comes from seeing gains and losses in your own money.

This year, you’ll have plenty of reading and studying to do to better understand the world you’re entering.

2. Transition phase toward a target portfolio

Naturally, you’ll want to keep going and try out several investment strategies to see which ones you feel comfortable with. You’ll do a lot of research and evaluate different companies and investment styles, and inevitably, along with your successes, you’ll make a few mistakes.

This is also where you’ll start allocating a portion of your invested capital toward your target amount. This phase is quite time-consuming because it lays the foundation for your life as an investor.

We move away from the purely theoretical approach of the first stage and toward a more practical focus.

3. Maturity phase for its target portfolio

The portfolio is built up to its allocated amount and involves periodic monitoring of the portfolio. The investor now has sufficient autonomy to navigate the stock market.

So what’s next ?

Following this article, the goal is to start investing in an ETF and a few individual stocks. The next articles will focus on choosing this ETF and then selecting individual stocks.

Subscribe now

Here is the link for the next article:

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

I got the business right, but got the momentum wrong. I was happy with the good buy result, so that’s all I had. I had to come back and add to the position later to “catch up” for entering too early.

This is the lesson behind three categories of stock you’ll experience as a buyer.

Good buy. Often called “a no brainer”, as you pay a reasonable price for a great business. That’s exactly what Adobe and Novo were last year. But the stock could go anywhere within a year. Your money can be stuck with no progress: not the best for psychology. After a few years, if you are patient enough, you can get easily 20% per year on those.

Great buy. The ratio between potential loss and potential upside turns clearly in your favor. You’re paying an attractive price for an excellent business at a moment when sentiment is depressed.. This is the zone where discipline is enough. It’s Alphabet on April 25, at 17x earnings in the middle of the AI-disruption scare on Search.

Screaming buy. A market anomaly, like Meta and Netflix in 2022 — both crushed in the same bear market, both recovering into some of the best returns of the decade (Netflix is almost a 7-bagger in 3 years). This is the dream every investor chases — and it’s rare, and brutally hard to catch, because it shows up in the middle of panic, exactly when most people have no cash left and no stomach to act.

Example with Netflix in 2022

• With a buy in the good buy zone ($60), and a sell in may 2025 ($120), you made 25% CAGR.

• With a great buy ($40), you made 43% CAGR

• With the screaming buy zone (20$), you made 80% CAGR.

If you just buy and hold, your performance tends to the long term rentability of the stock, with probably no more than 25% CAGR (which is already excellent on the long term).

The general guide: For an exceptional business with intact fundamentals, a PE in the 15-19x range is usually a reasonable marker for great buy territory; below that, you’re approaching the screaming buy bar. Take a step back before clicking the button. I bought Microsoft with a PE of 22 at the end of June, I think it’s a great buy. Adobe would be there with a PE of 14. A scream buy is a market anomaly — rare, and confirmed only after the fact.

What I take from this: I’ve raised my own bar. I used to settle for good buys. Not anymore. The Adobe experience — being satisfied too early, then having to come back and add to the position to correct for it — taught me that patience has a cost when you skip it, even when the thesis holds. My new standard for any new position: great buy, minimum. As long as the opportunity of a great buy, I will stay with my portfolio and continue to investigate. I won’t add positions for the sake of diversification.

Compounders

Do you remember the first rule of investing? Don’t lose.

The goal of this category is to secure your capital and let it appreciate over a long-term horizon. It’s the Quality phase of Warren Buffett (after his cigar-butt phase).

The objective is to maximize risk-adjusted return by holding exceptional companies you buy at a good price. Peter Lynch called it Growth at a Reasonable Price (GARP).

The rationale behind this is simple: roughly 4% of stocks generate 100% of long-term market returns.

The longer you hold them, the more important the growth of free cash flow becomes, and the less important the entry PE ratio becomes.

You can invest actively, holding individual stocks, or in a passive way with ETFs.

You may ask: which ones?

Since the best long-term risk-adjusted returns are in quality stocks and large ETFs, you would rather hold the Mag-7 or the MSCI World / Nasdaq-100 than no-growth dividend stocks. You could expect 15-25% per year of growth just on the FCF, plus a rerating of the PE.

Investors who got beaten down on a quality stock may say ‘I’m here for the long-term’. It is a good sentence because in this category, time is your friend, and you’d probably recover if you are patient enough.

Multibaggers

The goal of this category is to get massive gains in a short period of time. Why wouldn’t everybody do that ? Because it’s damn difficult ! You may find:

• Growth stock: finding it before everyone else

• Turnaround stocks: distinguish which company will recover

• Cyclical stocks: correctly anticipate the direction before the actual move

• Cryptoassets or commodities: correctly anticipate the direction before the actual move

You can also invest here in an active way, with the holding of individual stocks, or in a passive way with ETFs.

The way you deal with it is with the intrinsic asymmetry of the stock market: what you can lose is limited (max 100%), and what you can win is potentially unlimited. When you are leveraged, you break this asymmetry (generally, don’t be leveraged, especially in multibaggers). The ideal setup is a stock where ‘either I gain a significant amount, or I don’t lose much’. Don’t forget these are riskier stocks.

Some market spots are ideal for this category: small-caps, as they are under-covered, and inaccessible to big money because of illiquidity — meaning they can rapidly become a major shareholder.

Most 10-baggers come from small-caps, and some of them have the advantages of compounder as they have quality stocks, and of a multibagger with the re-rating.

I said you could expect 15-25% per year for the compounders, plus the rerating. For the multibaggers, almost everything is possible here, plus the rerating. It is a reason why I don’t like small-caps indexes. Moreover, the best ones will leave the intermediate indexes to be in the top indexes (nasdaq100, SP500, etc.)

Some stocks compound for so long that you end with a 10-bagger just by sitting on them: if you hold a stock for 10 years with a 25% CAGR, you have a 10-bagger. They are multibaggers in disguise - I still categorize them as compounders.

In this bucket, time may bless you or punish you. And the volatility is quite high (30-70% in a year is normal), you need a stronger stomach than in compounders. And if you’re leveraged, volatility is your enemy.

How to deal with both

• In a bull market, multibaggers may capture a significant part of the upside. When a multibagger pays off, it usually compensates for all the losers left along the way. As the portfolio grows, part of the gain stays safe in compounders, and part gets reallocated into other multibaggers. I call this a ratchet effect. It matters because a portfolio has a natural tendency to concentrate, especially toward its multibaggers, giving them a disproportionate size.

• In a bear market, capital can be reallocated from compounders to multibaggers to regain exposure to the upside and get strong entry points on beaten-down multibaggers.

• Tax matters from the moment you enter a position, not just at exit — always think in after-tax terms.

• As the portfolio grows, the natural tendency is to shrink the multibagger percentage and grow the compounder percentage. Above $1M, being 100% in multibaggers feels like madness: why risk losing everything you have for money you don’t need?

My personal portfolio of six figures is designed to run 50% compounders, and 50% multibaggers, though I frequently need to reallocate toward compounders (the ratchet effect).

Questions

This probably raises a few questions worth asking yourself:

• Categorize your own positions: which bucket does each one actually belong to?

• Are you satisfied with your current allocation between the two?

• Is there redundancy in your portfolio — multiple positions doing the same job?

• Is there real diversification, or does it just look diversified on paper? Are the underlying theses and key factors correlated?

• Do you understand what you hold and why you hold it?

• Is each stock you hold actually better than its category ETF?