Chit Chat Stocks - The Complete Investment Checklist with John Rotonti

Episode Date: November 5, 2025

On this episode of Chit Chat Stocks, we speak with recurring guest and Bastion Fiduciary Portfolio Manager John Rotonti on what a complete investment checklist looks like. We discuss: (00:00) Why have an investment checklist? (06:13) Questions to ask in the research process (19:02) Flexibility in Investment Analysis (23:30) Overriding the Checklist: Real-World Examples (28:46) Identifying Generational Investment Themes (29:44) The Industrial Revolution and AI's Role (36:36) Valuation in the Investment Process (47:49) Portfolio Management Strategies JRo's Notes: https://lastbastion.com/author/jro/ ***************************************************** JOIN OUR EMAIL NEWSLETTER AND CHAT COMMUNITY: ⁠https://chitchatstocks.substack.com/⁠  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  ⁠https://www.interactivebrokers.com/⁠  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠⁠https://fiscal.ai/chitchat⁠  ********************************************************************* Portseido is your best portfolio tracking & reporting solution that helps you track all investments in one place. We personally use the software to track our portfolio returns across brokerage accounts. Try it for free today: ⁠https://portseido.com/?fpr=ryan63⁠  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome into the Chit Chat Stocks podcast, a podcast that helps you find your next great investment. Today we have on recurring guest, fan favorite, John Rotonti from Bastion Fiduciary to talk investing checklists. We have a bit of an evergreen episode for the listeners today. Just as a little note for some context, if we talk about anything present day, we

are recording this on October 9th. We're going to be releasing it about a month later due to scheduling stuff for our own schedules. But if we talk about anything and there's any news related to it after that, we're not going to be referencing that, obviously, because it was recorded a month prior. But John is a portfolio manager, longtime guest. And if you want any sort of more information, you want to read anything, you can. We'll have a link in the show notes here, a link to his newsletter that will go over his portfolio, returns, all that good stuff from Bastion Fiduciary. And we'll have a link to a checklist article that was written at The Motley Fool, I think, five years ago. So, John, that was a long intro, but welcome back to the show.

First question, why use an investing checklist at all? Thank you for having me, Ryan, Brett. Always glad to be on the show. Thrilled to be here with y'all. I think, to the question, I'm a process-oriented person by nature. I enjoy designing and refining frameworks and processes. The theme for my former podcast, The J-Row Show, was investing process, and it was entirely based on interviewing portfolio managers about their investing process. So first thing, it's something I'm very passionate about. So next is, you know, I think a checklist can be helpful to some investors because they help to ensure a level of discipline and rigor and hopefully repeatability into the stock picking process.

If there's one thing I practice and try to harp on a lot, it's, you know, discipline and intensity and deliberate practice and putting in those reps. And for me, the checklists are the reps. um so checklists checklists help me to improve the odds um that i'm seeing everything clearly that my thesis is clear in my head and that i've connected all of the dots that i've identified um and i think they help me improve the odds of getting the outcome that i'm looking to get for my clients um i also i also think checklists keep me humble y'all because i'm not Buffett. I'm not Druck. I'm not Tepper. You know, I'm not Lynch or Tillengast. And while I do think that, you know, I have a lot of investing and market knowledge and files in my head to draw

on, I can't do all the mental gymnastics in my head that, you know, those investors can do. So I use tools and aids to help me increase the odds of a good outcome. And a checklist is one of those tools. And then a final reason is a checklist forces me to slow down. I'll say slowing down has not always resulted in positive investing outcomes for me personally. I do think though that slowing down will benefit my clients in the long run. Just quickly, I'm sure y'all heard Druckenmiller's recent interview in the last month or so when he said something along the lines of sometimes I will buy a stock. I was quoting Druckenmiller here before we actually do the research. And he said that his team and himself identified AI as an important theme, a strong

tailwind. And so they bought NVIDIA before they really did the research on it because he said sometimes the market opportunity could disappear. By the way, we own NVIDIA in the portfolio that I manage at Bastion. Buffett, just one more thing on slowing down and why it's not necessarily always the best thing is, you know, Warren Buffett was asked why he didn't buy any stocks in March of 2020. And he basically said it all happened so quickly. You know, the stock fell and then recovered in three weeks, basically, because they came in with a bazooka of stimulus and all of these other things. And so it was almost too quick to act. I'll give you an example. today, the day we're recording this, Ferrari stock is down like 14 or 15%. And it's not a

stock I own. It's not a stock in the portfolio. I don't own it personally. But I can't act on it today in the portfolio if I wanted to, because I haven't done enough research on it. I understand that Ferrari is a very unique automaker. I understand that. I understand that it has an elevated luxury brand. I understand that they very closely control supply. I understand that it's like getting into a club. There's a long wait list of buying a Ferrari and really it's previous Ferrari owners that are the ones that are able to buy these things. I understand all of those things, but I haven't done enough research. I haven't run it through the checklist. And so, you know, based on the standards that we have set at Bastion Fiduciary, I can't buy it

today, even though, you know, I think today would be a good buying opportunity based on what I know at this point. And so it forces me to slow down. I do think that will help my clients in the long run, but it has, you know, it has not always worked out that way in the past. Yeah. That also could be in a year where it seems like every stock is going up each month. That maybe is something that can hurt all this, but it's a balance of, all right, I see this opportunity, but I want to let it pass, but I also want to do the research. It's definitely something. I mean, all different sorts of investors have different sorts of philosophies on that, but let's get through the checklist. I think investors, listeners would be just interested in what

the checklist is. We can't, you know, maybe we, depending how long it is, we don't need to maybe read off the entire thing, but we can just start at the beginning. How do you start? What are the overall questions? When you begin your research, where are you starting and what are you going through line by line? Yeah. So, you know, for, for listeners that are interested in, you know, a more comprehensive list, um, over five years ago, as you mentioned, Brett, I did publish an article on fool.com. The title of that article was, Do You Have an Investing Checklist? You know, I think it was a pretty comprehensive checklist for long-term oriented, fundamental quality investors. I've refined the checklist a bit since then,

but I still think it's a very good, rough framework. And that checklist from five years ago was just 10 core questions. But each of the 10 core questions had several sub questions to help me answer that core question. So as an example, in that checklist, you know, the very first question was, does the business have a healthy balance sheet? But then there was over a dozen sub questions that helped me answer that one question. Does the business have a healthy balance sheet? Another example of a core question on that checklist from five years ago was, does the company have a medium or lower risk profile? But then there were almost two dozen sub-questions under that that helped me get to an answer I was comfortable with on the risk profile.

So I've made some refinements to what I'm using today. As you said, Brett, I won't read all of the questions, but I will read some of them. And by the way, one of the reasons I don't want to just read all the questions? Because I do think that to some degree, investors need to keep their checklists fungible. Meaning that, you know, you focus on different questions based on different opportunities. You know, several great investors have boiled down successful analysis and successful investing to trying to identify the two or three core value drivers and develop a point of view on those value drivers? Excuse me. Well, that one business, a key value driver could be improving the health of the balance sheet, right? That could mean everything. Can they improve the health of

the balance sheet? Can they avoid financial distress? But another business could have $100 billion in net cash. And so improving the balance sheet has nothing to do with the thesis, right? the balance sheet is also rock solid. It's $100 billion of net cash. In that case, maybe the question that's more relevant is, how good is management at allocating capital? What are they going to do with that $100 billion? And so while I do think that there are some checklist questions that apply to all businesses, I think there are other questions that need to either be weighted more heavily in certain businesses or even tweaked or asked differently for certain businesses. But in general, here's what I'm asking. So if I'm learning about a business for the first

time, y'all, what is the value proposition and what problems are the company solving? That's kind of, you know, a really, really core question I'm asking across all businesses. How did the business get to where it is today? Not just a business history, but what challenges did that business have to overcome and how did it adapt along the way? And as it adapted, did it become, you know, a stronger, more resilient business. I try to understand key inflection points or innovations or long-term secular trends in an industry. I try to really understand the competitive environment and how the industry leaders have created value for shareholders over time. I spend a lot of time trying to understand the barriers to entry, the sources of moat, if there are any, and the

durability of those moats. I ask myself, where will the growth come from? Will it be organic? Will it be acquired? What are the opportunities for reinvestment at high returns on invested capital? How capable and transparent is management? And how are they incentivized? Do they run the business for shareholders? Are they maniacally focused on profitable growth and maximizing long-term per share growth. And then just like, what stands out to me about this business and this management team? Is there something unique?

Is there something different, hard to replicate? Like, what is really drawing me in? What is jumping off the page and slapping me in the face? And then just real quickly, I'll run through some, that's if I'm researching a business for the first time, but then there's maintenance coverage checklist questions. So, like, once a company has gotten into the portfolio, every year, at least once a year, I will ask these questions. Did the company's moat get wider or narrower?

Did management think and act like owners? Do the company's products and services remain relevant? And is the company still offering that good value proposition? If the company experienced an industry-specific or broader economic downturn, how did the manager team respond? on? How did they react? Do I think the per share value will be higher in five years? And roughly what rate do I think per share value will grow? Is the valuation still reasonable? Did any new big risks present themselves? And if so, do I have an opinion on how the company will respond and adapt to the new risk environment? And maybe lastly, did any new big opportunities

present themselves? And do I have an idea of how the company will benefit from those opportunities? And do I understand, do I think I understand how that will flow through the company's financials over time? Yeah, something you said there that I really like is it requires some mental flexibility with each individual company, right? You can get good returns with Costco or NVIDIA, or you could have, I guess, looking back. But the theses were very different. The head markets were very different.

The industry tailwinds, obviously very different. But you raise – I like the way you approach things where as opposed to just some sort of standard scoring system, it's uniform questions that can apply to all situations. Well said, yes. I guess my follow-up there is, is it like a repository as you're doing your research where you've built up now this mental database or repository of companies where you've already gone through that checklist? Or are there times where you have to just start it from scratch? And if you do, how long does that process take? I imagine it depends how well you know the company a little bit to begin with. But if you don't know the company at all, how long does it take to get through that checklist?

So, like I said, I have this checklist written down in places. I published one on fool.com five years ago. But at this point, it's pretty mental, like it's just a mental repository. And as I'm going through the business, reading everything about it, I'm just kind of answering questions and putting it into a document, a research report of sorts. Honestly, if I'm researching a business for the first time, depending on how familiar I am with the industry, the competitors in the space, it could take me anywhere from a week to a month. I don't, you know, I think I can get, and in some cases, maybe less, honestly. I think that I can get comfortable with some businesses, you know, and like I said, a week, maybe even sooner than that. Now, I don't have a lot of distractions.

You know, I'm doing this most of the day. I'm a pretty fast reader. I've gotten good at, you know, my process and going through this mental checklist. And, you know, it took me longer in the past is what I'm, you know, suggesting. But no, it's pretty efficient process now. Sometimes, you know, a delay, a delay could mean like, so as I'm reading about a business, learning about the business and the manager team in the industry, I'm answering these questions, right? I'm also coming up with new questions of things that I don't understand, right? And so I'm

keeping a list of questions that I want to investigate further, ask my network about, or ask the management team about. So let's say I'm at the point where I've answered most of those on my own, by doing further investigative research, by asking people in my network. And now I need to talk to management to get the answers to these last few questions. Well, maybe they're in a quiet period, right? Maybe I can't get management on the phone for another month. And so that sort of, you know, there are things that will extend the length of time that it takes me to get to a point where I'm comfortable making a decision on the stock. But, you know, like a week to a If you're a regular listener to Chit Chat Stocks, then you've probably heard us talk

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I think listeners may be having the same thought right now as I am. And we've talked to management teams in the past, but not too much. I think a lot of people are afraid to try to reach out to management teams. And I guess I just want to ask, what's your best tactic to get people to actually want to communicate with you and respond to you directly to IRs or something like that? Or where have you found success in getting, you know, management teams to talk to you? I'm real, I'll just say, you know, I'm relentless when it comes to it. So I think that sometimes I just fatigue them. And they finally say, look, we got to talk to this guy, honestly. Um, but I also be honest and say, it helps, um, to write that first email to the IR department. Now,

sometimes it's the, you know, you know, investor relations at xyzcompany.com or info at xyzcompany.com and it's just going to the IR department. But sometimes on a slide deck, they'll give you the CFOs email, you know, or they'll give you like the head of IRs direct email. So sometimes I'm emailing people directly like that as well. And it helps when you say I'm a portfolio manager. And it helps if you own the stock in the portfolio. So I can say I'm a portfolio manager at Bash and Fiduciary and I own stock in XYZ company in the Bash industrial infrastructure your portfolio. I have a couple of questions for you. That helps them get back to you sometimes. I don't have any secrets beyond just being relentless.

No, that's a good tip. I imagine some of the people that were listening to this podcast or decided to click on this were thinking there was going to be some regimented, pure, structured checklist that you can go through for every company. But from what I'm hearing you say, it sounds a little messier, like have your questions, but be flexible and basically just read, read, read and ask, ask those questions along the way. My follow-up here is, have you ever had a company where maybe it didn't check certain boxes for you? It didn't look great on your checklist, but you've said, I'm going to go ahead and buy shares anyways. Yeah. So I'll give you two examples. So I'm a quality investor. I think y'all both know that. I think your

listeners know that. Now, quality is in the eye of the beholder. And so I may be looking at quality through a different lens than other quality investors. But for the most part, a common definition of quality that I've used, that I still use, and that I'm not going to argue with at all is a company with a long history of profitable growth with stable or rising margins and stable or rising returns on invested capital. In other words, the earnings are predictable and not volatile because they're stable or rising. There's not a lot of cyclicality to the earnings, to the margins, and this company has a long history of growth. That's one very common definition of a high-quality business. I'm not going to argue with it. Well, one company,

and that's something that I look for in my checklist. I'll go to value line. I'll go to fiscal AI. I'll look back as far as the data will give me how the fundamentals trended over that time. Well, one company in our portfolio, one of our largest holdings, is a company that was spun off from its parent company a little over a year ago. And while at the parent company, it wasn't profitable as part of the parent. So it's only been a standalone company for a little over a year, maybe close to two years now. And so if you're screening for long operating history as a public company with a long history of stable profit growth, this company fails miserably. right? It's, there is no history, first of all. And it, and if there was a history,

it was not profitable. But today it's quite profitable. It's free cashflow generative. And I've published, you know, a report giving, you know, four reasons why I think it's, it's margins and returns on invested capital are going to be substantially higher in the next five years. So that's an example where I overrode the checklist, for example. One other example is another definition of quality, which I use, and I'm not going to argue with, and it's a great definition, is sustainably high returns on invested capital in excess of the cost of capital. and to measure that spread, right? Called the excess return spread

or the economic profit spread. How large is the spread between return on invested capital and cost of capital? And if one company generates 40% returns on invested capital and the cost of capital is 10%, that's a 30% spread.

But if one company generates a 12% return on invested capital and has a 10% cost of capital, it's only a 2% spread. And a lot of quality investors will sort of force rank companies based on the size of that excess return spread. Well, we own in the portfolio a railroad. And the railroad, because it's capital intensive, has a long history of generating returns on

invested capital in excess of its cost of capital. But the spread is small. this you know it's maybe three or four percentage points not 20 percentage points uh and and and so some people may say well that's a low quality a lower quality business because it has a smaller excess return spread whereas i would say that the railroad that we own i think is one of the widest moat companies i've ever studied um and and and i think that the durability of that moat could reach decades into the future, if not 50 or 100 years. And so, said another way, I think that the railroad that we own has a much longer competitive advantage period or fade period before returns on invested capital fade all the way down to the cost of capital. So those are

two examples of when I've overridden the checklist. Do you have any investing themes included in the checklist and by this do you mean like sectors kind of growth themes like for example the big one today is you know ai infrastructure spending that's something that's a thematic investment that has worked phenomenally well over the last three years do those type of criteria make it in the list and does that help you find opportunities to you know buy or avoid yeah i mean we could talk about ai until we're you know blue in the face and i'd be happy to do that. I would say that themes mainly come into place for me when I've identified an inflection point or what I think is really a generational shift that is long duration in nature

with an emphasis on that durability, that long duration part of it, because for the portfolio that I manage at Bastion, I'm much more focused on the duration of per share growth than I am on the rate of growth. And so let me try to explain how I developed one of these generational inflection point themes. So in 2020 during COVID, we all saw the price we paid as a country for choosing efficiency over resilience when it came to domestic supply chains and manufacturing capacity. There were boats sitting off the port of LA for months before they could get the goods onto shore and into our domestic supply chain. That was, I think, a wake-up call for at least some people in the US. I was on Motley Fool Live several times in 2020,

in the early days of COVID, talking that out with Bill Mann and Brian Stoffel. Brian himself has this anti-fragility investing framework that I think a lot of people should study. It's a really good framework. But Brian and I related to this supply chain crisis on Motley Fool Live in 2020 because I sort of consider my framework a resilience framework. It's what I've always called it. And he calls his anti-fragility. And so we enjoyed discussing this trade-off that the U.S. made by outsourcing all its manufacturing, you know, prior to COVID, you know, decades prior to COVID. And that trade-off was efficiency for resilience. And so it's something that Brian and I really enjoyed talking about in 2020. And then in 2020, Mark Andreessen published an essay titled

It's Time to Build. It's Time to Build. This is 2020, right? And now this essay left a mark on me. one because it was a great essay but also because this was written by the same tech visionary that published the article titled why software is eating the world back in 2011 so the software eating the world guy is now saying back in 2020 that we need to urgently build more infrastructure in the u.s urgently and in the essay he says we under invested in our physical asset base and we outsourced our desire to be builders he said we quote um had widespread inability to build in our country end quote and he says we quote chose not to have factories and systems that make things we chose not to build end quote um and he says that you

know he says that you could see this in u.s manufacturing you could see it in u.s housing You could see it in US transportation. He said you could see it in the lack of nuclear power generation. He listed each of those industries. This is back in 2020. He says that, you know, our nation, our founding, our founding fathers, our nation, you know, the great titans of industry that made America. we built America as builders, physical assets. But he said that recently we outsource our ability to build overseas and that we have to get back to our roots of building. So this sent me down a rabbit hole into U.S. infrastructure underinvestment and demise. I learned during this research process, which started in 2020 after COVID, after reading Andreessen's article that we need to build, I went down this research hole. I noticed that it was not just infrastructure underinvestment in the US, but also in other parts of the world. And I ultimately developed a thesis that the world

needed massive infrastructure investment going forward, and that this would shift market leadership change from SaaS to physical assets and hardware that the world desperately needed. Now, I wasn't on X in 2020. I didn't join until 2021. But I researched this thesis, y'all, for like two years after reading the article by Andreessen. And in 2022 and 2023, I started to post on this thesis on X. And so on October 15th, 2022, I said, I do not think the asset-light, profitless companies that benefited from 0% interest rates are going to be the same companies that we need to change the world going forward. That was October 15, 2022. October 16, 2022, I said these capital-intensive companies

are critical and indispensable to the world, and that's where I'm focused. um july 24th so i should have started with this one sorry july 24th 2020 sue 22 i said i think we're at a generational inflection point and it's at these inflection points that investors can make or lose a lot of money january 2nd 2023 i said we under invested in infrastructure for the last decade plus as the world lost its mind on apps which add very little value and are not indispensable So I'm betting that many of the world's most changing innovations come from tangible, capital-intensive industries. And then the last one, August 8th, 2023, I said real tangible industries are going to have an incredible decade, in my opinion. So that's how I got to where I am today as an investor in industrial technology, infrastructure, and housing-related businesses.

So yeah, that theme has been in development in my head for over five years now. Those were some prescient words. I mean, looking back and you think about the timing as well, obviously today it seems like AI infrastructure, physical assets, like you said, is pretty much everything market participants talk about. We talk about it every week on our show, it seems like. So, thank you. It was prescient. But what matters is what happens going forward, right? And I think that depends largely or at least partly on whether we're in an AI bubble that's just going to pop and fizzle, or whether AI is going to be largely responsible for ushering in an industrial revolution, a fourth industrial revolution. Because if it's just an AI bubble that's going to pop and fizzle, then it pops and fizzles. But if it's an industrial revolution, well, industrial

revolutions don't last three years. I say three years because that's when ChatGPT was first released about three years ago. And so I think that's an important question for long-term industrial infrastructure investors to answer is, do you think that AI is ushering in an industrial revolution, which I think is at least probable? So we're getting a little bit away from the investment checklist conversation, but I want to keep going because I think this is fun. The, what are you looking at to answer that question? And this, this applies to any time there's some sort of a theme that people are investing

around, are you trying to just focus on the end markets? How are the end markets benefiting? How do you decipher between bubble and boom? What questions do you ask? This episode is presented by our favorite portfolio tracking tool, PortSido. Do you know what your actual investment returns are? Well, if you're like me, then the answer is probably no. And that means you need to try PortSido. PortSido is the ultimate portfolio performance tracker. With Port Sido, you can easily aggregate your various brokerage accounts and instantly see your actual investment returns. That includes all your investments too, stocks, ETFs, and even crypto. If that's your thing, you no longer have to guess what your returns are.

With Port Sido, you can find out in minutes how your returns stack up versus the market. And that includes a dividend tracking dashboard and even tracking of short positions. I've been looking for a tool like this for a long time because I was sick and tired of trying to track it manually. And Port Saito has finally built it. And for the first time ever, Port Saito is running a platform-wide discount to celebrate Black Friday. From November 26th to December 1st, you can get up to 40% off. That means you would get three months of Port Saito Pro for just $27. Again, that is portsaito.com. The link will be in our show notes. so so jeff bezos was um i'm sure y'all seen clips he did he did an interview in like italy

like last week or something and he said um hold on i have it uh okay quote ai is going to change every industry in fact it's a very unusual technology in that regard in that it is a horizontal enabling layer the biggest impact that ai is going to have is that it's going to affect every company in the world it's going to make their quality and productivity go up and then he finished this quote by saying i literally mean every company um so he like put a you know an exclamation point at the end of it i literally mean every company i don't know if he's right or wrong but if he's right ryan and brett i don't think you know i think we're in a bubble but the question the question is is is what stage of the bubble what inning are we in

and then the question is if if if ai is going to usher in a a a march toward industrial revolution then we could have multiple bubbles along the way right we can have like rolling bubbles where we have periods of of just insane investment like we're seeing right now and then periods where we digest that investment and then in you know other periods of insane investment but if you if you look at sort of the blueprint that technologists have laid out for where ai could go it's you know it's right now ai is not has not solved anything right like it has not cured disease it has not you know cured aging and increased longevity right it has not you know discovered new science you know it has not discovered alien life on

another planet whatever it is but if it does can you imagine the investment that's going to pour into ai i mean if it cures disease like if it if it comes up with with an answer to you know the environmental damage we've done to our planet whatever it is if it if it discovers new science new industries new products that we couldn't even imagine then i think this could be extended over a much longer period of time and some of the smarter people than me have suggested you know we go from where we are now with ai to you know physical ai so robots humanoids to you know maybe full self-drive maybe full autonomy you know to you know space is a important industry that's getting a lot of attention and then you know quantum after that and

and so i don't i don't know something else to consider is that this administration at least um i think understands that we're in an existential crisis i'm sorry and that ai could represent an existential threat to our country if we lose the AI race to China. I think we have an administration that is trying to ignite an industrial revolution. So, you know, I don't know where we land, Ryan, but I think that the chances that it ushers in something much bigger than what we're seeing now are at least not zero. So let me segue back to something within the checklist that could also be related to people looking at AI stocks today, and that is valuation. I know people get, there's a lot of differing opinions out there. You have, you know, the David Gardners of the world that don't really pay attention to it much, if at all, and they're highly successful. And then there's deep value people that make it their number one priority.

For you going through the checklist, maybe in relation to thematic investing as well, when does valuation come into the equation? That's a good question. You know, I think the easy answer for a quality first investor like myself is to say that, you know, I'm a quality first investor. I'm a business analyst first and foremost, not a stock analyst. And so the first thing I do is research the business. ensure that it meets the quality standards that I've set, and then think about valuation

and weighting as a last step. That's sort of the easy answer that I think a lot of quality-first investors may share. And while it's accurate to say that I am a business analyst and a quality-first investor, it's not accurate for me to say that valuation comes at the last step or really any particular step. Rather, I'm thinking about valuation throughout the whole due diligence process. Right. And like, what do I mean by that? It's so when I first started investigating a business, right, a business I've never looked at before. You know, the first thing I'm going to do is scan the financials going back 10 years or so. This is not my full, you know, financial statement analysis, but I scan them right in the first 10 minutes, 20 minutes, 30 minutes

To get an idea of the quality of the business, the growth trajectory and the stability or the cyclicality of that growth, in the margin trajectory or the stability and cyclicality of the margins and the returns on invested capital, in the health of the balance sheet, in the capital allocation and the uses of cash flow, in the free cash flow margins and the free cash flow conversion, and in the EPS growth profile historically. it. So I get a quick sense of the quality. And then, of course, I glance at the multiples right off the bat, too. I glance at the free cash flow yield. I glance at consensus expectations to see what the market is sort of pricing in. Right. And so from the very first 10, 20, 30 minutes, I'm thinking about valuation in conjunction, like simultaneously as I'm thinking about the quality of the business and the quality of the management team. Importantly, though, as a quality-first investor, if the business that I'm researching checks off a lot of these checks and I decide that it's quality, I will continue to research it regardless of the valuation.

Even if I think the valuation is insanely high today, and if I like the business and I like the management team, I will continue to research it so that I can put it on the watch list, so that I can put it into my investable universe, so that I'm ready to buy the stock when the market gives me that opportunity, right? And so, you know, I don't stop researching a business once I determine that I think, you know, the valuation is too high. And then, as I learn more and more about the business, the industry that it operates in, and the management team, then I will build conviction around my own estimates for growth. No longer rely on consensus estimates. I'll build my own estimates for margins, ROIC, EPS growth going forward. um and so as i go through the research process as i learn more about the business more about the management team i get a clear idea of the valuation and what i think the company is worth um so it's business analysis but it's constantly and simultaneously thinking about valuation at

the same time um and ryan like you said it can be it can be messy at times but that's what's going on in my head i'm constantly thinking because i learned something new about the business right And that whatever I learn new may change my estimates or assumptions for future growth. And my estimates or assumptions for future growth are going to change what I think about the valuation. So it's this constant like pull and push and pull. And you never know when you could get a situation like Adyen that had that one week, I think it fell 50%.

And if you had not researched it beforehand, you can go, well, some people thought it was a high quality business. People I like, like this business, but I don't really know it. Let me start researching. then the opportunity goes away. But if you had researched it beforehand, maybe you go, okay, this is the one time to strike. I'm ready. And it was on the watch list for a year. Exactly. Exactly. And so I only allow myself to buy stocks that are on the watch list. And something only gets on the watch list if it's been vetted, if it's gone through the checklist,

if it's gone through the due diligence. Is there one question in your checklist that trumps all the others that you care about the most by far? Like, I think we went through some of them earlier on in this discussion. Is there any one that really stands out? Like if, if they check that box, I'm willing to overlook some of the others kind of thing. I mean, there are a few, I mean, you know, it's gotta, it's gotta meet certain quantitative quality standards. um not going to invest in something with a bad balance sheet just not going to happen they're deep value investors that have had a ton of success with that but i'm just not me um you know i'm not going to invest in something that's unprofitable and i'm not going to invest

in something that's not growing profitably right and so there are there are there are standards that that must be met quantitatively and they're pretty high standards um but then you know another one maybe ryan is like uh value proposition like customer obsessiveness um are you delighting your customers are you are you providing them you know joy i don't know if that's the right word but are you providing them a good value proposition because that's one of the main ways i think that you remain relevant in you know a rapidly changing world um so like like one one company that i so all of my holdings i think offer a good value proposition but one i'll just call out is um it's in the portfolio quanta services ticker pwr so bloomberg green

published two articles a few months ago discussing the two primary bottlenecks preventing faster build-out of electrical infrastructure in the u.s and europe and really around the world. And the two bottlenecks were transformers, which there's a variety of sizes of transformers. Okay. But for a lot of the big ones that are used on the long distance transmission lines, which we're in desperate need of in this country, there's like a three to five year wait for transformers. And the second bottleneck was skilled craft labor. So it takes 10 years to train a lineman 10 years and about four years to train an engineer to do lower voltage work so it's it's it's a long process um well quanta under the leadership of

their ceo he knew that labor they're google it like electrical electricians especially like high voltage electricians and linemen are in massive shortage in this country, massive shortage, and it's a massive bottleneck. So what did he do? He bought a line college. He bought the trade school in 2018. The company did, Quanta did. What did he do about transformers? He's made at least two, maybe three acquisitions of transformers, manufacturing companies that manufacture transformers here domestically in the US. And I think Burns, I read a note from Bernstein like three months ago saying that in a short period of time through these acquisitions, Quanta now controls, I think, 20% of transformer manufacturing in the US, right? And so he solved

both bottlenecks, which is a massive, massive value proposition for people wanting to build data centers or any sort of electrical infrastructure in the US. The other thing he did was, you know, when he took over as CEO in 2016, Quanta was an electrical contracting firm, contractor, right? And that was more commoditized work with lower returns on equity. Well, now he has transitioned them

to be a turnkey electrical grid, renewables and technology infrastructure solutions provider. And so they are called, if someone wants to build a data center in the US, they're probably calling Quanta on day one or a company like quanta on day one because quanta handles all of the permitting permitting starts very very early in the process barely three three four years before this thing is built

sometimes they handle the permitting they handle the planning they handle design engineering construction and then even procurement of in-house transformers right and so there they are one company that can speed up that bottleneck process here in the US and they're providing a great value proposition by doing so. All right, folks, before we move on, we need to tell you where we get our data. Fiscal.ai. Fiscal.ai is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts in our podcast. You'll see it in our newsletter, this is our one-stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including the largest company-specific segment and KPI

data set on the internet. That includes metrics like Duolingo's daily active users, Oracle's backlog, Rocket Lab's revenue per launch, and literally millions of more data points. They've also got earnings call transcripts, ownership data, equity research reports, and much, much more. If you want complete financial data at your fingertips, you need to check out Fiscal.ai. And if you use our link, fiscal.ai slash chitchat, you will automatically get two weeks of Fiscal Pro for free, no card required. If you want to upgrade, our link will also get you 15% off. Again, that's fiscal.ai slash chitchat. The link will be in our show notes.

I think that's a great case study. We have two questions here, but now that I'm looking at them, I kind of think they combine together. one was about adding trimming or selling an existing position with your checklist. And another one was about portfolio management, which I guess is, you know, trimming, you know, having that proper allocation. So after doing, you know, the watch list research, what are you doing for, or do you have a checklist for portfolio management? And do you force rank positions? Because I think one of the largest problems I have, Ryan has as well as we go, all right, I found another company I like, but is it better than my least favorite holding?

That's a very difficult thing to do. And I sometimes feel like I make a lot of mistakes with that. So on that, on that, um, full.com article that I mentioned from five years ago, um, I talk about that exact question, you know, is the, is whatever company I'm studying better than what I already own? Um, and you know, I do think that that's, it's a difficult question to ask, but I do think it's the right question to ask because everything about investing is opportunity cost. And so let me tell you what I did about that. So first thing let me say is I try to manage a low turnover portfolio just to, so there's not going to be a whole lot of like adding and trimming and selling and buying. But my turnover will be elevated this first year

because I launched the portfolio in January with 32 stocks. And that was a mistake. And it was a mistake because it was too many for me. It was a mistake for me because my long-term conviction around those last five or six stocks, you know, in that sort of force rank, Brett, the last five or six, my long-term conviction in those was substantially lower than for the core 25 or 26 stocks.

And my, let's say my elevator thesis for those bottom five or six stocks was just a, it was just very poor compared to my elevator thesis for the core 25 or 26 stocks. um and so that's how i knew 32 was too many for me it wasn't that it was too many to manage the universe that i manage is 50 or 60 stocks it was that the conviction in those last five or six weren't there the thesis wasn't as slap me in the face obvious as for the other 25 or 26 what did i do i sold those stocks and now i'm down to 26 stocks feel much better about where i am now So I sold the lower conviction stuff. They're still on the watch list.

I still kind of monitor them. And maybe the thesis becomes more clear to me at some point. So they asked about ads, trims, and sales. So the main reason I will add is when a stock in one of my highest quality businesses with a management team I love partnering with sells off. so what happens is greed takes over in my body greed takes over and i want to increase our partnership my partnership my client's partnership with this management team at a lower stock price so that's the main reason i'll add i'm not great at adding on the way up i know that's a good skill i've missed a lot of returns in the past not doing so because like i'll buy an

initial position in something but it's a small position in something you know this has happened to me in the past and the stock will go you know up 20x or something but it was this tiny itty bitty position and so it went it went up 20x on me and now it's just sort of like a small position not tiny itty bitty but had i been adding to it all along it would have been life-changing right so i'm not great at adding up although i know it's something that i need to get better at and i'm working on it so i mainly add when something i love gets crushed just like bleeding red everywhere um the main reason i will trim is when a is when the valuation of a stock in a business i love with a manager team i love gets unreasonably high i'll trim the position and just

let the rest of the position grow into the valuation um so you know i may trim it a little and then say you got to earn your way back up, right? Like maybe it was a 5% weighting. I trim it down to a two or a three and then I just hold it and it'll earn its way back up. It'll go into that 5% position or it won't and we'll see.

So I guess quick follow-up. It sounds like the adding and trimming is largely price dependent. It's- Yes. You've already determined that it's a business you want to own, that kind of thing.

Yes. Do you ever trim because of anything related to business quality? Like you're starting to question the quality or when, if you get to that point, does that mean it's time to discard it entirely? Probably sell it. Probably. Yeah. For me, if I'm questioning the quality of the business over a long period of time, I'm

not talking about, you know, having a tough quarter, right? Like, or even a tough year. Because I do think that everything over time is cyclical. If you give everything a long enough time period, it's cyclical. Climate change is cyclical every 100,000 years. So if you give everything a long enough time frame, it's cyclical, in my opinion, my strong opinion. And, you know, companies will go through periods of faster growth and higher margins and slower growth and maybe lower margins. But I want to give companies a long enough leash to go and hold them through those growing pains, right?

Because the other reason you want to do that, the other reason I want to do that is because sometimes it's during down cycles and rough patches when companies like plant the seeds for rejuvenated growth coming out of the crisis. Like, you know, you've all heard this quote, like never let a good crisis go to waste, right? Like that's one of the things I should have mentioned in my checklist. Like when I'm evaluating management teams, it's how have they responded to crisis in the past, right? Like, were they buying distressed assets? You know, were they buying back their undervalued stock? What were they doing so that when the market turns up again or their industry turns up again, they have accelerated growth, higher market share, higher margins, higher long

term earnings power. So I want to give them a long enough leash to grow through that. So if I question the long term, you know, quality of the business, I'll probably just sell out in that case, right? um and then yeah and so when it comes to to selling out um there's a few reasons one just deterioration of the moat which we just talked about um i'll sell out if the valuation just gets insane um or if i lose trust in management and those two are easy decisions to make right like the Wells Fargo, you know, scandal years ago, fake account, a million fake accounts, easy.

Completely lose trust in management, you know, pull the ripcord, blow out. It's easy decision to make. But the other reason I will sell is if I decide I'm wrong, and that's a harder decision to make because, you know, sometimes, you know, looking wrong and being wrong are not necessarily the same things. And so when a stock is down, you are balancing your long-term outlook and your long-term conviction and your patience, which I like to think that I'm a patient investor, on the one hand, with the possibility that you're missing something on the other hand, with the possibility you're getting something wrong on the other hand. So you're balancing long-term outlook and patience with being too stubborn. And so that's a harder reason to decide

to sell. The only way that I am able to make that decision is when a stock is bleeding red is to have a very good understanding of why the stock is falling. This is key to me. If I don't understand why the stock is falling and I'm not excited to buy it, like I just said, if it's a business I love and it's falling, I'm buying, right? I'm averaging down. But if i'm not excited to buy on the way down then it's because i am unsure of why it's falling um and so that's really important to me to understand why i think it's falling and i'll give you a case study here as well so position we own in the portfolio is old dominion freight line odfl we own it um it's probably my biggest loser at this point uh so the

the question is why is the stock down so much well the freight industry has been in a three-year recession three years so then the question and so you could look at the the cast freight index is at its lowest level since covet shutdowns in 2020 and prior to that it had not hit this level since the global financial crisis so we're talking like really bad freight numbers at an industry level. Freight shipments have fallen 20% over the last three years, according to Kobayashi, the letter, Kobayashi letter. They're on X. So why is that the case? Always keep asking why. Well, the U.S. has been in a nearly three-year manufacturing industrial recession, as measured by the ISM manufacturing PMI. Three-year industrial recession. Well,

60% of Old Dominion's business is industrials. So now it becomes really clear to me. We've had a three-year mild industrial recession in the US as measured by the ISM manufacturing PMI. By the way, that is the longest industrial recession in the history of the US going back as far as the ISM PMI has been in existence. It's not the deepest. It's the longest industrial recession in U.S. history, as far as this index goes back. 60% of Old Dominion's freight, Old Dominion's business is industrial. Another 20% of their business is home building. Well, home building is in a recession. So 80% of Old Dominion's end markets are in recessionary, contractionary territory right now. So now the question I ask myself is, do I think industrial

and housing are going to remain in a recession forever. And based on what I know now and believe, I don't think they're going to remain in a recession forever. And the last little like cute little fun thing I'll say about Old Dominion is during this three-year freight recession, they've increased prices every year above and beyond inflation. So they've been able to maintain their pricing power, which speaks to that value proposition. You asked me what's the most important question in my checklist, Ryan, the value proposition. Well, their value proposition is we deliver on time and undamaged. We deliver your goods on time and undamaged, right? So because they can deliver that value proposition year in and year out, they increase their prices

year in and year out. And they've been able to do that over the last three years during this freight recession. So what kind of pricing are they going to be able to get in a healthy market? Like when volumes actually return. And I think a lot. And I think that's going to lead to very high incremental margins coming out of this for Old Dominion. And so that's how I think about selling. John, we appreciate you joining the show. Before we leave, I'll give you one last opportunity to talk any final takeaways for any of the listeners on Investing Checklist, what you want listeners to take away from this episode

and any additional thoughts that we didn't get to on managing a portfolio during a, as you mentioned, AI boom potential bust cycle? You know, I think we covered it all. I'm just grateful that y'all had me on the show.

I always appreciate the questions, the discussion, you know, the exposure. I think y'all have a wonderful podcast. As you know, it's like my favorite. It is my favorite. And so keep doing the great work. And thank y'all. Thank the listeners as well.

All right. We appreciate that, John. Thank you for joining the show. I think the listeners enjoyed as well. We can see it in the numbers. They do enjoy when you come on, but let's get out of here. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation.

Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Remember to check out those links for any of the written work and to sign up for John's newsletter, follow the Bastion Portfolio. Thank you everyone for tuning into this episode and we'll see you next time.