Security Analysis Checklist for Quality Compounders

⚠️ This checklist reflects my personal research and methodology and is not financial advice. Use it for educational and informational purposes only; always do your own due diligence before making any investment decisions.

This checklist is designed to build a secure, long-term wealth-compounding portfolio of high-quality, profit-generating businesses—one that can ultimately sustain all my financial needs and ambitions, as well as those of those I am responsible for.

Inspired by Spinoza’s Ethics, each section will begin with the rule (definition) and list core criteria (axioms), followed by explanatory notes (scholia). The sections are listed according to importance, with the first being the most crucial.

1. Meaning

Definition

The underlying business must be immediately intelligible to you personally.

Axioms

Do you understand their products? Would it be something you would yourself hypothetically buy?
Good customer satisfaction is preferred.
Brand recognition is preferred.

Scholia

A company should be something you can grasp at a fundamental level without relying on opaque jargon or complex financial engineering. Ask yourself: Do you understand what they sell or the service they provide? Could it be a product or service you would genuinely consider using yourself? Clarity and familiarity reduce the risk of investing in something you cannot meaningfully evaluate.

Other markers of meaningfulness include customer experience and brand presence. Companies that consistently satisfy their customers often demonstrate operational competence and durable value. Likewise, strong brand recognition can signal trust, market penetration, and the ability to maintain a loyal customer base over time. A business that is immediately intelligible and resonates with you on a personal level is easier to monitor, understand, and have confidence in over the long term.

2. Metrics

Definition

The business itself must be efficient, have a moat and a competitive edge.

Axioms

RoIC: 10%+ minimum per 10, 5 and 1 year(s), by far the most important metric.
Revenue: 10%+ preferred per 10, 5 and 1 year(s).
EPS growth rate: 10% preferred. (Share dilution is shunned.)
RoE: 10%+ minimum per 10, 5 and 1 year(s). A good efficiency gauge.
FcF growth rate: 10% preferred per 10, 5 and 1 years(s). Is the business generating cash?
FcF to long-term debt ratio: 1:3. A company should be able to pay down all its long-term debt within 3 years of current free cash flow (or median if volatile).
Dividend of 3-15% with a sustainable payout ratio.
Dividend growth of 10% preferred per 10, 5 and 1 year(s).

Scholia

A high-quality business is not just profitable; it must be efficient, durable, and defensible in its market. The company should demonstrate a sustainable competitive edge, often referred to as an economic moat, which allows it to maintain profitability over the long term despite competition. Metrics provide a quantitative lens to assess this durability and efficiency.

The most important metric. RoIC measures how effectively a company turns capital into profits. A consistently high RoIC signals that the business can generate returns above its cost of capital, reflecting both operational efficiency and a protective moat.

Steady revenue growth indicates a business that is expanding its market share or creating new value for customers. It demonstrates the company’s ability to scale sustainably.

Growth in EPS shows profitability at the shareholder level. Avoid companies that achieve EPS growth primarily through share dilution; sustainable growth should come from real earnings improvement.

RoE measures how efficiently the company uses shareholders’ equity to generate profits. It complements RoIC by giving insight into internal capital efficiency.

Cash generation is the lifeblood of any business. Growing free cash flow ensures that a company has the resources to reinvest, pay dividends, reduce debt, or weather downturns.

Ideally, a company should be able to pay down all long-term debt within three years of current free cash flow (or median if volatile). This ensures financial stability and reduces vulnerability to interest rate fluctuations or economic stress.

Dividends are a signal of financial health and management confidence. A sustainable payout ratio ensures that dividends are maintainable and not eroding the company’s growth potential. However, it may be skipped if dividends are not the focus, for, if a management is competent, they will know how to allocate the capital back into the business effectively.

Consistent dividend growth reflects both profitability and a management team committed to returning value to shareholders over time. Again, if dividends are not the focus and management is competent, this can be skipped.

Together, these metrics provide a quantitative backbone to your investment decisions. They allow you to filter for businesses that are not only profitable but also resilient, efficient, and capable of compounding wealth over decades. I use these to screen potential investments and quickly throw away those that are too speculative or badly run.

3. Management

Definition

The business must be run by competent and long-sighted people.

Axioms

Observe at least a few quarterly report presentations. What does management say about what went right, wrong, their expectations and promises? Do they appear trustworthy and down-to-earth? What is their story, have they worked long at the company?
Examine at least a few quarterly reports. Check again what management focuses on.
Examine whether management is paying itself exorbitantly. This is especially a red flag if they do so when the business is under great duress.

Scholia

The business must be run by competent and long-sighted leaders. A company’s strategy, resilience, and long-term value creation are inseparable from the people steering it. Even a fundamentally strong business can falter under poor management, while disciplined, thoughtful leadership can sustain growth and navigate challenges effectively. Competent management balances operational execution, capital allocation, and shareholder alignment, while demonstrating integrity and strategic foresight.

Management’s commentary offers a window into their priorities, judgment, and transparency. Pay attention to how they explain successes and failures, whether their promises are realistic, and if they communicate with honesty and humility. Longevity at the company can signal deep institutional knowledge and alignment with long-term shareholder value.

Beyond presentations, review what management emphasizes in official filings. Look for consistency between words and actions, and check whether they are focused on sustainable growth, prudent capital allocation, and operational efficiency rather than short-term gains or optics.

Excessive pay, particularly during periods of company stress, can indicate misaligned incentives or a lack of long-term vision. Management that maintains fair, performance-linked compensation reflects responsibility, prudence, and alignment with the broader health of the business.

In sum, management quality is as critical as the business model itself. Leaders who are competent, ethical, and long-term oriented provide a foundation for durable wealth compounding, while poor leadership can undermine even the strongest fundamentals.

4. Margin of Safety

Definition

You must pay for ownership at an appropriate price to you.

Axioms

A quality business will rarely be on sale in virtue of its quality; however, Mr. Market is an erratic sycophant and good deals may come to those who wait. I am personally happy with Charlie Munger’s tenet of buying a great business at a fair price rather than a fair business at a great price (more on the reasoning behind this below). Nonetheless, it is important to account for one’s own potential errors and so I set a 25% margin of safety to my models, and I will strongly prefer to buy at or below this price.

Scholia

Ownership must be acquired at a price that provides a sufficient margin of safety. Even the highest-quality business carries risk if purchased at an excessive price. Paying too much can erode returns or magnify losses if circumstances shift unexpectedly.

A truly outstanding business is rarely “on sale” precisely because its quality is recognized by the market. Yet markets are imperfect, driven by sentiment, fear, and short-term thinking—what Benjamin Graham called the whims of “Mr. Market.” Those who are patient and disciplined may occasionally encounter opportunities to acquire excellent companies at favorable prices.

Following Munger’s principle that it is better to buy a great business at a fair price than a merely fair business at a great price, emphasizes quality over opportunistic bargains, prioritizing long-term wealth compounding.

Nonetheless, acknowledging one’s own fallibility is essential. To account for potential errors in valuation, I apply a 25% margin of safety to my models, and I strongly prefer to acquire shares at or below this adjusted price. This buffer reduces downside risk, allowing for unforeseen events or miscalculations, while preserving the compounding potential of high-quality businesses over the long term.

5. Qualitative Aspects

Definition

The Business must be of great quality.

Axioms

How does the business create value? A business is a productivity concept. If it cannot create value through its products and services, there is no coherent meaning to the current revenue, earnings or cashflow, however exuberant these may appear. And with no earnings or cashflow, you may just be buying a very expensive advertisement.
Has the business been operating long? What is its history? How is its relationship to its shareholders, employees and customers? Is it a fair and just business? Is it cunning and inventive? How does the business deal with struggles and difficulties? Read reports and news articles about it.
Is the business local or global? If local, does it have the potential to become global? What are its potential hard limits?
Who are its competitors and how is this business doing in relation to them? Has this the potential to change in the near future? How about the long future?
Is the business boring or the hottest, AI/Metaverse/disruptive item on the block? Strong preference for boring companies, particularly essentials, as these tend to be both easier to understand and more durable.
Macroeconomic concerns. Ignore. Too complex.
Political concerns. The threat of war and political instability may warrant selling out of a position if there’s a real chance of permanent capital loss (e.g., China-U.S. tensions). But, this too, is usually ignored. A higher-quality company will better survive trying times than a lower-quality one.

Scholia

The business must be of exceptional quality. Quality is the foundation of long-term wealth compounding: it ensures durability, resilience, and the ability to consistently generate value over time. A high-quality company demonstrates strong fundamentals, ethical practices, and a sustainable competitive advantage.

A business exists to produce value. Examine how it generates revenue and profits through its products or services. Without real value creation, apparent earnings or cash flow may be illusory—essentially paying for a very expensive advertisement. True quality is reflected in consistent, meaningful contributions to customers and society.

Consider the company’s history, longevity, and relationships with shareholders, employees, and customers. Is the business fair, just, and inventive? How does it respond to challenges? Longstanding performance and ethical behavior signal reliability, resilience, and a capacity to navigate adversity. Research reports, news articles, and historical data to understand its character.

Assess whether the company operates locally or globally. If local, does it have realistic potential to expand internationally? Understanding the company’s growth limits helps evaluate the ceiling of its long-term value creation.

Identify competitors and measure how the business performs relative to them. Consider both short-term dynamics and long-term shifts in the industry. A high-quality company maintains or strengthens its position against competitors over time.

Prefer businesses that are “boring” rather than addictively chasing the latest trends like AI, Metaverse, or other disruptive fads. Essential, stable companies are often easier to understand, less volatile, and more durable, providing a safer base for long-term compounding.

These are generally ignored. Markets and economies are complex and unpredictable; a truly high-quality business can endure fluctuations without being derailed by broad economic trends.

Consider geopolitical threats only when they pose a real risk of permanent capital loss. For instance, extreme tensions between major powers might warrant caution. However, superior companies are better equipped to survive political and social turbulence than weaker peers, making quality the primary hedge against uncertainty.

6. Ownership

Definition

You must be proud of what you own.

Axioms

Ideally, as Buffett says, the best time to sell a stock is never. My plan is to buy stocks and hold them forever. The main idea is to compound wealth and attain financial freedom through dividend payments 30+ years down the line.
- Exceptions to this rule is if the business consecutively fails in one of the key metrics and stops being profitable.

Scholia

You must be proud of what you own. Investment is not just a mechanical exercise in numbers—it is also a reflection of your values, judgment, and confidence. Owning a business that aligns with your principles and inspires respect fosters discipline, patience, and a long-term mindset, all of which are essential for compounding wealth over decades.

Ideally, as Warren Buffett advises, the best time to sell a stock is never. The goal is to buy high-quality businesses and hold them indefinitely, allowing compounding to work its full power over decades. This approach emphasizes patience, trust in management, and faith in the enduring value of the business. The primary objective is to build sustainable wealth and eventually achieve financial freedom, including through dividend income many years down the line.

A stock may be sold if the business repeatedly fails to meet critical metrics or ceases to be profitable. Pride of ownership includes the discipline to recognize when a company no longer meets the standards that justified your investment in the first place.

Owning businesses you are proud of reinforces a sense of responsibility, promotes careful monitoring, and encourages you to invest only in companies you genuinely respect and understand. This psychological alignment with your investments reduces emotional errors and strengthens long-term decision-making.

7. Mantras

Definition

The business must resonate with rational investing principles.

Axioms

Would you own this company for ten years? If you won’t own it for ten years, you shouldn’t own it for ten minutes.
Would you own this company in its entirety as the only stock in your only portfolio? If you won’t own the entirety of a company, you shouldn’t own a slice of it.
The only reason you buy a financial instrument (a slice of a business) is to make money. Should it not be paramount that the business itself is making money? A bird in hand is better than two in the bush.

Scholia

The business must resonate with rational investing principles. Investment decisions should be grounded in logic, discipline, and long-term reasoning rather than speculation, hype, or short-term market fluctuations. A rational investment is one that you can justify with evidence, metrics, and coherent thinking—something that aligns with the fundamental purpose of investing: generating wealth reliably over time.

By adhering to these principles, you align your portfolio with logic, evidence, and rationality, avoiding emotional mistakes and speculative traps. Rational investing ensures that every position you hold has a clear, justifiable purpose in building long-term wealth. I invite you to find others or come up with your own.

8. Personal Characteristics

Definition

The most dangerous thing in the market is yourself.

Axioms

Focus. Ideally, the stock should be one of about one to ten others in your portfolio. If you spread yourself around to 20-25+ other stocks; how do you intend to keep track of them all? And, if diversifying is priority, why are you not just buying the S&P500? Moreover, as Buffett again says, why put money in the 17th best stock when you could put that money in no. 1?
Patience. In this game, a sturdy stomach is more important than a brilliant mind. Simplicity is preferable to complexity. This is by no means easy, however.

Scholia

The most dangerous thing in the market is yourself, and everything and everywhere in the market is out to get you, weaken you, and undermine your rational abilities. Emotional reactions, impatience, overconfidence, and distraction can all destroy even the best investment strategy. Developing the right personal traits is as important as selecting high-quality businesses; discipline, focus, and patience are the true foundations of long-term investing success.

Ideally, a stock should be one of roughly ten positions in your portfolio. Holding 20–25 or more stocks can dilute attention, making it difficult to monitor each business meaningfully. If diversification is your priority, consider investing in broad indices such as the S&P 500 instead. As Warren Buffett emphasizes, why allocate capital to the 17th-best idea when you could concentrate on your highest-conviction positions? Focus ensures you understand your holdings, maintain confidence in your decisions, and maximize the impact of your best opportunities.

A strong temperament is often more valuable than raw intellect in investing. The ability to remain calm during market volatility, resist impulsive decisions, and allow compounding to work over decades is crucial. Complexity, or sophistication, is rarely a virtue (perhaps for traders); simple, well-understood businesses managed consistently will outperform convoluted strategies. Exercising patience is difficult, but it is essential for long-term wealth creation.

Cultivating these personal characteristics aligns your behavior with rational investing principles. By mastering focus and patience, you minimize self-inflicted losses and maximize the benefits of high-quality businesses held over the long term.

9. Tax

Definitions

Tax is a necessary good.

Axioms

Taxation can really eat into the dividends and capital gains. Particularly overseas source-tax on dividends, which are usually locked at 30%, unless special conditions apply.
1. Overseas dividend source-tax can be reduced to 15% from 30% if your nation has a tax agreement with the nation where the company is based. E.g., Norway has a tax agreement with the U.S. such that dividends paid to me from MSFT should be with the 15% source-tax applies.
2. This reduction of source-tax also depends on the broker. Some brokers simply do not do this. E.g., eToro does not take into account source-tax, neither is it possible to ask them to do it, whereas Nordnet does this automatically (this also displays the quality of a broker).
Certain nations offer special stock savings accounts that allow dividends to be paid out with no tax or delayed tax, or no tax until the certain funds are taken out of the account. Usually, these come with other restrictions, such as no overseas companies, or only national or EEA/EU companies. Nonetheless, the bonuses offered by such accounts may vastly outweigh the potential of local companies over global powerhouses.

Scholia

Tax is a necessary consideration in investing. While it cannot be avoided entirely, understanding and planning for its impact allows you to protect more of your returns and make more informed investment decisions.

Taxes can significantly reduce your effective returns, particularly on dividends sourced from overseas companies. Many nations impose a default withholding tax—often 30%—on dividends paid to foreign investors. If your country has a tax treaty with the nation where the company is based, the source tax can often be reduced, for example from 30% to 15%. Norway’s agreement with the U.S. allows dividends from companies like Microsoft to be taxed at 15% instead of 30%.

Now, not all brokers apply these reductions automatically. Some brokers, like Nordnet, adjust source taxes according to applicable treaties, while others, such as eToro, do not. This highlights that broker choice is not just about fees or usability—it also affects your after-tax returns.

Many countries offer stock savings accounts or tax-deferred investment vehicles that allow dividends to accumulate without immediate taxation, or defer tax until funds are withdrawn. These accounts often come with restrictions, such as limiting investments to domestic or EU/EEA companies. Despite these constraints, the tax benefits may outweigh the advantages of investing in individual foreign companies, particularly for long-term wealth compounding.

Understanding tax mechanics is critical for rational investing. Even a high-quality, dividend-generating company can underperform in your portfolio if taxation erodes its effective returns. Planning for tax efficiency ensures that your capital compounds as effectively as possible over the long term.

10. Things to Avoid

Definition

Do not lose.

Axioms

Do not lose. The worst thing for an investor is not volatility or lagging market returns, but permanent capital loss. This must be averted at all costs. It interrupts the compounding machine.

Scholia

I repeat, do not lose. The preservation of capital is the foundation of successful investing. Without protecting your principal, even the best investment strategy cannot work effectively over the long term. Compounding requires a base that remains intact; losses, especially permanent ones, interrupt or destroy that process.

The single most dangerous outcome for an investor is not short-term volatility or temporary underperformance, but losses that are irreversible. Permanent capital loss erodes your compounding potential and can set back decades of careful wealth building. Every investment decision should be made with this principle at its core. Risk management, careful valuation, and selecting high-quality, resilient businesses are the primary tools to prevent permanent loss.

In essence, the idea “do not lose” is both a guiding principle and a risk filter: it reminds the investor to prioritize safety, discipline, and prudence above all else. Protecting your capital ensures that your wealth compounding machine can continue to operate unimpeded over decades.

Corollary

This checklist is a framework, not a prescription. It captures the principles, metrics, and behavioral disciplines I consider essential for building a durable, long-term wealth-compounding portfolio. Its purpose is to guide thought, foster discipline, and encourage careful evaluation of businesses—always with the understanding that investing carries risk and personal judgment is paramount. By following these guidelines, you prioritize quality, patience, and rationality, laying the groundwork for decisions that can endure the test of time. This checklist has served me well: over time, it has allowed me to outperform both the S&P 500 and the Nasdaq Composite, demonstrating the effectiveness of a disciplined, quality-focused approach.

I hope this has been helpful to you in thinking systematically about investing and evaluating businesses. Use it as a reference, adapt it to your own approach, and may it serve you well on your journey toward long-term financial growth and personal happiness!

Author: Filip Niklas

November 16, 2025