Equity Selection Framework · v14 · 27 July 2026

How a business becomes a position

One precondition, three hard gates, a ten-year destination, then eight pillars weighed together. Evidence is gathered first; the verdict is authored last, and logged with its date.

House convention: owner-earnings are discounted at 15% — the hurdle is the discount rate. The margin of safety lives in the price, and risk is never double-counted.

STEP 0Precondition

Are the cash flows simple and predictable enough to forecast a ten-year destination at all? If not, the analysis stops here — you cannot value what you cannot predict. A complex composite can clear this, but only barely, and the compromise is named rather than waved through.

STEP 1The three hard gates

Any single failure ends it, regardless of price. The gates run before valuation — a cheap price never rescues a failed gate.

Integrity

Pillar 2 · People

Any reason to distrust the people? A crook runs the equity to zero at any entry price — the one “no” with no valuation appeal, because value is expropriated rather than eroded.

Harvesting

Pillar 6 · Scale Economics Shared

Does the business grow by extracting price from trapped customers? A harvesting moat invites regulatory and competitive attack, and is avoided outright.

Value trap

Pillars 4 & 7 · Valuation / Size of the Prize

No growth and cost inflation — the melting ice cube. Cheap is only cheap if the business is still there in ten years.

STEP 2The destination

Picture the business fully scaled in ten years and reason backwards. Do I believe in that end-state enough to own it the whole way? Everything below is judged against the destination, not the quarter.

STEP 3The eight pillars

Each is scored clears / weak / fails. This is a weighing, not eight gates — a name does not need all eight — but every compromise is named in the verdict, and the business and the people are never compromised on.

01Extraordinary business

What mechanism is producing the moat, and is it still running?

02People

Would I trust their reporting in a bad year?

03Reinvestment

Where does the next dollar go, and have they proven they can do this?

04Valuation

Is intrinsic value at or above today's price, and how far below can I buy?

05Win-win-win

If it doubled, who gets hurt?

06Widening moat — scale economics shared

Is scale shared with customers, or hoarded, and is the moat widening or being competed away?

07Size of the prize

A big problem, defensible capture, a long runway — compounder or cash cow?

08Value density

If AI gets 100x better, is this more valuable or less relevant?

STEP 4Name the edge

Informational, analytical, or psychological? Only a psychological edge — the ability to hold to the destination when others cannot — is durable. If the honest answer is “informational,” reconsider.

STEP 5Sizing

Conviction × value sets the weight: no hard cap, roughly ten names, most of the book in the best few. Get paid for uncontrollable risk you can price; refuse moats resting on knowledge you cannot have.

STEP 6The verdict — logged

The pillar scorecard and gates, the opportunity type, the named edge, the sizing and risks underwritten, every named compromise, and the one fact that would most change the thesis — the falsifiable test. Sell only for opportunity cost. The verdict is what every annual re-run is graded against.

Evidence only. No ratings, no recommendations — not investment advice. See the research →