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How much time do you put into each case before buying it?


anders
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Hi all,

 

It would be interesting to find out how much of your time you spend on each case before buying it..??

I a) read quarterly reports of the company and competitors b) go deeper into the business structure c) think I have a sense of where the business is going and d) buy it at sensible price.. then constantly monitor downside risk vs upside potential.

 

The a) and b) would take about a week or two depending on the size of the company, then another week for c), then waiting for d) to happen. 

 

But would this be enough to justify my purchase?? I am quite worried about Graham's warning - believing you are investing when in fact you are speculating.

 

Take BAC as an example, after much thinking and reading I bought it last year, but I honestly must say that I still cant possibly see all the risks involved in this company. Conventional wisdom would tell me that if you cannot determine future catastrophy risk, the safety of the principal, then it should go into your too-hard-pile.. but the potential risk/reward at that time was just too good to ignore.. So I am just lucky that the price soared after my purchase based on market psychology or on another random event (a speculation) or was it based on skill and time put into the case (investing) based on my a) b) c) d) stated above..?  ???

 

I understand the exponential learning curve making the process go faster, i.e. reading reports on same company (Buffet -IBM) for years and suddenly the correct price appears..

 

I would really appreciate thoughtful answers on this matter,

 

 

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I have to say that I'm probably at the same point as you seem to be, about 3-4 weeks.  It can take longer if I don't know anything specific about the company or industry (seeing the company on a screen, a value website or here).

 

I am quite worried about Graham's warning - believing you are investing when in fact you are speculating.

 

Take BAC as an example, after much thinking and reading I bought it last year, but I honestly must say that I still cant possibly see all the risks involved in this company. Conventional wisdom would tell me that if you cannot determine future catastrophy risk, the safety of the principal, then it should go into your too-hard-pile.. but the potential risk/reward at that time was just too good to ignore..

 

I'm going through the Intelligent Investor again and taking notes as I go.  Your post reminded me of a passage in chapter 1, page 21;

 

Speculation is always fascinating and can be a lot of fun while you’re ahead of the game.  If you want to try your luck at it, put aside a portion – the smaller the better – of your capital in a separate fund for this purpose.  Never add more money to this account just because the market has gone up and profits are rolling in.  (That’s the time to think about taking money out of your speculative fund).  Never mingle your speculative and investment operations in the same account, nor any part of your thinking.
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how many hours would the "3-4 weeks" you speak of be?

 

my best investments have been those that I have acquired knowledge, understanding over many years and have added in new funds when the opportunity presents itself.

 

my problem is that I sometimes want to jump in before doing all the necessary due diligence- i.e. sometimes I learn the hard way by making a mistake + losing money.

 

How much time to people here spending doing due diligence, vs just scanning various news sites, blogs, etc looking for ideas? I am afraid I spend way too much time here (I spend more time scanning rather than doing focused research + thinking, like a lot of the real smart guys do here) I am trying to change that.

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Its an interesting question.  The better question to ask myself is when do I get the best results?  The answer is when I have gotten to know a company over time.  I first held BAC warrants nearly 2 years ago, shortly after they were released.  I have read something about BAC nearly every day since then, including last years 10k, and this years 10qs.  I also follow all of the discussions on the board here about the investment. 

 

Another example is Seaspan which I have held for over 3 years.  I have bought on dips and sold some on rises over that time. 

 

Examples of inadequate research or too hard pile are Yellow Media, or RIM.

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Guess it really depends on what you're researching.  I like small companies, and most of their reports are small as well.  I can read an annual report in probably 20m.  Quarterly reports probably take 5-10m.  I can easily read a years worth of reports in less than an hour, then scan the past few years in another half hour to an hour.

 

Usually smaller companies don't have much news so it's easy to digest that information.  After that I can think about the idea for a while and consider if it would be a good investment.

 

I would actually say the biggest chunk of my time is spent thinking about the investment.  After I've read some initial things I'll just mull over an idea for a few days.  Think about the business, think about the types of people who would want to work for that company.  I'll think about what my reaction would be if I found out I was suddenly the CEO.  I'll think about who would want to do business with them, or my own business interactions with similar companies.  This is all intangible stuff, but useful.  More than a few times I've read a thesis, or looked at a business and walked away because I've dealt with the industry in real life.  What's on paper is vastly different then what happens in the real world often.

 

I've mentioned this in the past, but I try to approach investments in the most time effective way possible.  I formulate a quick thesis on why I'd want to buy.  Then I spend time looking at why I wouldn't want to invest.  Most investments die quickly here, eventually some make it through and I'll invest.  This method saves me from reading and researching everything I possibly can on a company only to find 60 hours later that I don't like a particular aspect.

 

I'm an individual, I do this on the side so time is precious for me.  I try to buy companies with a large margin of safety and I diversify.  Small companies are usually one trick horses so I'd rather have a stable full then concentrate into a few good ones.  Bigger companies are diversified in and of themselves.  Intel could probably be broken down into 20 or 30 small companies doing one or two things.

 

I also try to look at the time value of research.  If I'm investing $10,000 into a stock and I expect to make 50% I shouldn't be investing more than 100 hours if I want my billable research time to be $50/hr or more.  Of course not every investment will make 50% guaranteed.  Over the long haul even the best aren't sustaining more than 15-20% a year.  So those 100 hours would be like $15/20 an hour.

 

Just my thoughts, everyone is different.  You need to find a research style that fits you and how you invest.

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I'll let you in on a secret.  There is no secret.  There is no set amount of time to put in.  It will be different for every investment and for every person.  The problem a lot of people have is thinking that more time equals better results.  It might, it might not.  There are plenty of diminishing returns out there.  Note the studies done with the horse handicappers and each additional piece of information.  As Klarman says, "it would be a serious mistake to think that all of the facts that describe a particular investment are or could be known."

 

So the trick isn't how much time are you spending, but are you covering what you need to.  One thing I have seen in my career is that there are thinkers and there are doers.  There are people who always want to look at just one more piece of information.  Just one more thing to research.  Of course it never ends.  And there are people who review the issue and make a call.  Obviously there is a fine line between not doing enough and doing too much.  But investing is an art and part of that art is knowing when you are on the line, i.e. you've done just the right amount of work.  This is an individual determination and will be different for each person.  In the business world you can always tell those who can't make a call.  Whether it's the bankers, lawyers, etc. they are the ones who at 3 am are still noodling over things like a phrase in the preamble of an agreement.  They are unable to let go.

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how many hours would the "3-4 weeks" you speak of be?

 

See, after reading your post, now I'm not sure of the hours per se.  I'm like you, always scanning blogs and value sites and I jump around pretty frequently, so it's not as if I'm spending solid research time on an idea.

 

 

my best investments have been those that I have acquired knowledge, understanding over many years and have added in new funds when the opportunity presents itself.

 

I was just thinking about this over the weekend when I was re-reading some notes I had on Berkshire meeting last year.  (I was not there, I just keep notes on key ideas that the dynamic duo speak of).  It was last years meeting where Munger has said (again) how much he loves Costco and they think that IBM is a fantastic business that most people just don't understand. 

Buffett's been reading IBM's annual reports forever, he followed BUD for nearly 30 or so years before investing etc.

I'd love to be at a point where I had a list of a few businesses, maybe a dozen, that I knew inside and out that I would buy when the stock hit my price range. 

It was hearing Buffett and Munger talk about these types of businesses that made me realize that a great company doesn't mean it's a great stock.  I mean, I've heard the great investors say it a hundred times, but it was with these examples from Buffett and Munger that it sunk in. 

 

So far my list comprises of BRK, FFH and COST. ;)  I'm looking into FAST too.

Companies like PG, JNJ, CL, CLX, used to be on the list but there seem to be too many variables that don't affect other companies that do affect them (other than the general economy).

 

How much time to people here spending doing due diligence, vs just scanning various news sites, blogs, etc looking for ideas? I am afraid I spend way too much time here (I spend more time scanning rather than doing focused research + thinking, like a lot of the real smart guys do here) I am trying to change that.

 

So am I so any tips on re-focusing would be appreciated. :)

I'm actually better now than I was.  I started "Your Money or Your Brain" on Sunday and I'm more than half way through it and that's with work and having a young family.

Now I just need that focus to spill over to K's and Q's.

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Kraven,

 

I just wanted to say excellent post!  What you say can be applied to every aspect of your life, not just investing.  If you are finding yourself in analysis-paralysis on any type of project, maybe you should put whatever you're working on in the "too-hard" pile and either outsource to an expert (if its something you really absolutely need done) or just move on to something else that will give you a greater return on your time.

 

--Eric

 

 

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kraven, & oddball, both excellent posts.  I have noticed over the years that some people get

caught in details.  I maintain, as per Klarman, that every company has black box components to it.

No one, even Buffett can know even a fraction of the details of a company they dont control.  And no one can control for all factors.  At a certain point you invest, or dont invest, and handicap according to your experience and confort.

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I will probably spend 10 to 15 hours on a new idea that looks promising (quarterly reports, annual reports, analyst reports, conference calls & blogs). I pay a fair bit of attention to management conference calls and try to understand if they are any good and if they are shareholder friendly.  If 'the story' still looks good after this time and the price is good I may establish a position (2 to 3%). Then I do it all over again. If over a couple of months the story still looks good and the stock is still cheap I may increase my position (5 to 10%). My largest positions (more than 10%) are normally reserved for stocks that I have followed for years and where I am comfortable with management and where the stock sells off a great deal. FFH in past years and BRK last year are good examples.

 

Every year I try to add a few more companies into my circle of competence. It may be a couple of years before I actually buy a meaningful amount (as I wait for the stock to get cheap enough). What is great is once you have discovered companies that you really like it does not take as much time to keep informed; when they go on sale you are able to quickly review the story and purchase in quantity if it checks out. Pretty much everything was on sale in Sept/Oct of last year.

 

The part I really enjoy is finding and researching new opportunities. It is a little more stressful when buying beacause it does take years really get a good understanding of a business. Two recent examples for me are SNC.TO and DWA. 

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Every investor is different so there is no right answer.  For me it is usually a matter of a few hours.  A good stock (opportunity) will jump out at me.  Part of that is due to staying within my circle of competence and focusing on smaller stocks that are simpler to understand. 

 

As much as Buffett talks about having read a company's annual reports for thirty years or more before buying, he also notes that he has made many purchases within a few hours.  He can do that because he knows what he is looking for.  There is nothing wrong with being thorough, but many investors have a much more pessimistic (cautious) mindset than Buffett.  They are constantly looking for flaws and fear the future.  In addition, they probably have not spent enough time thinking through what they are looking for.  What makes for the ideal investment in terms of margins, capital intensity, sales growth, ability to reinvest in the business? 

 

If it took me many weeks to decide, I would be concerned about how clear of a margin of safety there truly is. 

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One of my investing "meta-strategies" involves two major steps:

 

1) Find a macro reason to invest in a sector or type of business.  The main elements are:

- The sector is out of favour.  Recently home building, US manufacturing.  Currently, the oil tanker segment has caught my eye.

- There is an unstoppable, significant economic trend that will benefit that sector in the long run.  Household formation is a good one for housing.  The one for the tanker industry might be the shift in crude oil demand from the US (more domestic supply) to China (less domestic supply) - I'm not sure, I'm still doing the research.  I've got some more learning to do on the economics of the tanker market to learn what macro trends may be at play.

 

This first part can take forever, or it can take a couple of minutes.  Usually it's the result of generally always being on the lookout for a good idea.

 

2) Once a macro investment theory has been established, I look for the right basket to put my eggs into.  I look at 10-20 businesses in the target sector that pass the basic tests.  Then I go to town on financial analysis and market analysis (usually 5-10 companies at this stage).  I like to understand how the industry is put together, who are the likely winners, who is in the strongest position financially (narrowed to 2-3 here).  Sometimes I look at the upside, but usually I just look at the downside.  The macro picture is what I am counting on for the upside.  The downside is best quantified as, how long can this business lose money for before I experience dilution or bankruptcy?  Eventually I whittle down the competing investments and decide on one business that I invest in and then watch like a hawk.

 

This half of the process usually takes 20-40 hours of real work and doesn't always result in a buy.

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If I could add one more comment. 

 

I would stick to the facts and less on the opinions.  You can read/scan countless blogs, newspapers, and web articles that are overflowing with opinions and often have little to no hard facts.  This will impact your decisions.  If you don't believe this you are self deluded.  Now by facts I mean financial analysis, looking at the numbers.  You can't ignore the soft factors like management and industry, but the financials will tell you a lot about them too.

 

As for the discussion on people who over analyze things, this can be very difficult.  Many people are highly conscientious by personality so they can't help but over analyze the facts.  Many of these people are engineers who like to refining and refining.  If you have that type of personality it will inevitably be difficult to make a decision.  Some people on the other hand are fast thinkers and overconfident in their abilities.  These people run the risk of moving too fast on an idea before all of the analysis is complete.  The key is understanding yourself, your natural tendencies, and thinking critically to overcome your innate shortcomings.  Balance is the key. 

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I recently interned at value focused mutual fund and It took me about 3 weeks to do a write-up, experienced analysts spend between a few days to 2-3 weeks depending on the scenario.  For the record people worked between 10-12 hours a day, so they could spend up to 200 hours analyzing a firm.

 

I used to be pretty quick with my analysis but now I have realized the work it takes to really look into a company.  They read 10K's, 10Q's, 4+ conference call transcripts, industry reports, 10k's of their competitors.  Model out various revenue scenario's and margin scenario's.  It is extremely rewarding work but I think it has ruined reading free reports forever for me haha

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I'm fairly inexperienced at the whole analysis process, and haven't developed my own standard methods yet, but I can say that it has helped me in the past to do some analysis, wait a few days, then review what I read and wrote down. Things you didn't see before will jump out at you unexpectedly. I think the mulling stage is an important part of the analysis process, at least when starting out (like me).

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I would stick to the facts and less on the opinions.  You can read/scan countless blogs, newspapers, and web articles that are overflowing with opinions and often have little to no hard facts.  This will impact your decisions.

 

I agree.  I guess to clarify my comments on blogs and value sites, I'm starting now to see the ideas that others like Nate and Adam post on their blogs and try to form my own opinion before looking at their analysis.  I have a bookmark folder for "current ideas".

So the plan is to research them myself and compare to what they have found. 

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I used to be pretty quick with my analysis but now I have realized the work it takes to really look into a company.  They read 10K's, 10Q's, 4+ conference call transcripts, industry reports, 10k's of their competitors.  Model out various revenue scenario's and margin scenario's.  It is extremely rewarding work but I think it has ruined reading free reports forever for me haha

 

This is where I still haven't gotten to, although with the banks and insurance I've read quite a few (since I'm investing in multiple ones).

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I'll let you in on a secret.  There is no secret.  There is no set amount of time to put in.  It will be different for every investment and for every person.  The problem a lot of people have is thinking that more time equals better results.  It might, it might not.  There are plenty of diminishing returns out there. 

 

+1

 

Sounds about right to me.

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I can generally get a pretty good idea of if I like something within minutes of looking at it... Granted, I won't pull the trigger (generally) til  I have done a decent bit of research. But this whole "need" for doing a specific amount is ridiculous. Sometimes something just screams buy me! When that happens, I have never been gun shy.

 

That said, I have spent years following a given firm, and never bought until it made sense.

 

I agree with all of the members that have said there is no rule... I will say this though: for me, I have never EVER put anything in excel (actually, I think I might have once, but, that was kind of a fluke). For me, if I have to run scenarios where I am concerned about a few points in a company's margins or get to concerned about a discount rate, I am probably too close to the line to invest. For me, there are just too many things out there that I know are beyond a shadow of a doubt, are a GREAT value. Then again, I am not constrained by hundreds of millions of dollars in capital. :)

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If your constantly finding ultra cheap companies then I guess no need to spend much time.  It would concern me that the company is that cheap and I would likely spend a lot of time paying attention to the details.  Debt covenants, notes on the financial statements, gathering industry knowledge from suppliers and large customers...  I have a paranoia that I have missed something I guess

 

Once I knew that I hadn't missed anything I would feel fine building a huge position - but it does take a certain amount of time to build the confidence that I have been absolutely thorough.  A lot of that might come from knowing your investing someone else's money and not your own.  One of the PM's I interned under would start a small position after a few hours, but I doubt he would ever put much weight on something without mulling it over for a while...

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For me its similar to playing chess, the more I play chess the more patterns I see for potential moves and the more potential outcomes I can map out in my mind. If the opportunity is similar to others I have seen/researched or engaged in the past then I might act very quickly.

 

I spend as much time as I can reading about different companies, industries, investors, finance etc... and while I do research specific positions before entering them, I feel that a lot of my research is done when I am not looking at a specific opportunity. So when a "no-brainer" comes along its a "no-brainer" because it somehow falls into my circle of competence which I am always trying to expand. If an idea seems too hard for me to understand, I will pass but I might add something to my reading list about the industry they are in so I can understand it better the next time something similar comes along. 

 

With regards to the original poster asking about investing vs speculation, I have wondered the same thing myself many times and taken Ben Graham's words on the subject to heart. The conclusion that I have come to is that if I feel confident that the odds are in my favor then I am investing intelligently and I don't let it get any more complicated than that. 

 

 

 

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For me its similar to playing chess, the more I play chess the more patterns I see for potential moves and the more potential outcomes I can map out in my mind. If the opportunity is similar to others I have seen/researched or engaged in the past then I might act very quickly.

 

I spend as much time as I can reading about different companies, industries, investors, finance etc... and while I do research specific positions before entering them, I feel that a lot of my research is done when I am not looking at a specific opportunity. So when a "no-brainer" comes along its a "no-brainer" because it somehow falls into my circle of competence which I am always trying to expand. If an idea seems too hard for me to understand, I will pass but I might add something to my reading list about the industry they are in so I can understand it better the next time something similar comes along. 

 

With regards to the original poster asking about investing vs speculation, I have wondered the same thing myself many times and taken Ben Graham's words on the subject to heart. The conclusion that I have come to is that if I feel confident that the odds are in my favor then I am investing intelligently and I don't let it get any more complicated than that.

 

It's good to have a firm general idea about why a company is both a better business and a bargain before investing.  This is much more important than engaging in paralysis by analysis.

 

If a company isn't a better business, stay away from it even though the price may be a bargain.  Wait until it's an unbelievable bargain, and even then don't buy unless the company almost certainly is going to be a survivor.  :)

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Thanks for many good insights..

 

Biaggio:

a case like BAC would demand about 2h-3h/day for two weeks, then thinking about it for another week while reading articles, conf calls, previous deals that went wrong, looking at previous mgmnt statements and so on.. The thing is, to go through BAC 10k page by page is very time-consuming for me... and many times I get stuck, such as when figuring out all the steps in Basel III or determine their NPL's and coverage ratio in reality, not the fictional one stated in their books..

 

Uccmal:

Tnx for inverting the thought process.. A student once asked buffett if its true that he could make a back on the envelope valuation in 5 minutes and he responded in some sort: "well its 5 minutes based on 50 years of preparation". So, I understand the exponential learning curve, my problem is getting there in most efficient matter..

 

Oddballstocks:

The idea with time value in research is brilliant and I have never thought about it in that way.. Many thanks! The inverting process and putting myself as complete owner of the business also helps me in deciding.. The best way would perhaps be to hire an analyst as your counterpart that get his/her compensation if s/he can convince you not to invest..

 

Viking:

I think your process is spot on. Previously I have entered the position in much heavy manner than 2-3%, afraid of loosing too much of my opportunity cost. But I tend to get in too early and then accumulate on the way down.. call it berkowitz syndrome of premature accumulation.. I think it would serve me well to go in your direction of process.. come to think about it, it sounds like Klarman's 20/80 rule: first 20% of your time covers 80% of the analysis..

 

Val9000:

Sometimes I also take the top-down approach.. supply/demand in oil tanker sector is indeed interesting.. (ie frontline: and I think GMO talked about it not so long ago..) Also, the huge supply/demand trend in agriculture is very enticing.. I have yet to find out if this is a better way then reading all comps A-Z..

 

Kevin4u2:

I agree, I have realized that many that I talk to keep telling me old facts.. but I urge them to look into first hand data where it usually states a different picture. I naturally fall into your second category -  thinker and overconfident in my ability - but am working hard with discipline to balance it out..

 

 

But here is my problem; I hear many talk about circle of competence and margin of safety, but one cannot possibly use a low valuation or a higher discount rate as a margin of safety to allow for this or that scenario or, assuming that something is in the circle of competence when there is a high probability that you at a later stage in life found out that you were way outside. Is Apple in your circle of competence when you later found out other risks that you initially didnt think about, ie that the commodity coltan, used to manufacture capacitors that goes into all the iphones, 80% of world production comes from Kongo, would simply vanish due to a force majeure..? That would have a tremendous impact on apple.. My circle of competence tend to shrink every year, for good or worse.. Im fine with that since it helps in my yes/no decision.. I am quite certain that success do not come from the size of the circle but rather how well you define the parameters.. my problem is defining the parameters..

 

 

 

 

 

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Anders,

 

One thought about your final comment about Apple.  I would say it's not worth worrying about for two reasons.

 

1) What you think the response might be is probably wrong.  Trying to model human behavior is impossible, people act certain ways for a variety of reasons, most we don't know.  Maybe they use that material because it's softer and requires let machine setup, a substitute is readily available but would require an extra day of machine tuning.

2) Apple has hundreds of people who's job is to take care of that, and if they fail they're not looking at losing a percentage of their investment portfolio, their kids won't eat, and neither will the rest of the children of Apple employees.  Never forget that there are people who are working 40hrs a week for these companies we invest in who have deeply vested interests.  For most the company represents 100% of the funds they use to live, they also have personal pride as well.  No one wants to be the person at the block party who's company failed because of their actions. 

 

Personal story: I worked at a startup a while back, we had a critical database fail that housed the company's data (literally the brain of the company), without it the company would have lost most customers.  When the database failed only one person could fix it, yet a team of us stayed there for 30+ hours sitting by just in case he needed our help in some way until everything was fixed.  The CTO stayed all night, CEO came in at some crazy hour.  People were motivated, we saw our jobs disappearing, especially the execs, they say their investment disappearing.  I think the CEO would have ran through fire if it would have helped the database.

 

The point of a margin of safety is it eliminates the need to know all the fine details that aren't relevant to the thesis.  I think the conclusion from this thread is that if you're working out the number of hours a miner needs to work in Africa to extract ore that goes into a microchip to be comfortable with the investment you need to think long and hard about the margin of safety, it probably doesn't exist. 

 

A general rule of thumb might be that the more assumptions you need to make about the investment the bigger the margin is.  Some of the stuff I'm looking at where the company is profitable and trading below cash require one or two assumptions, so a smaller margin is needed and probably a quicker decision.

 

One final comment to the exhaustive researchers.  Consider getting a job with the target company, seriously.  You probably know more than many employees do, and you would be extremely valuable to the company.  You also might get some extra shares as a bonus or something as well.

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