I’m a big believer in the 80/20 rule, aka the Pareto principle. In case you aren’t familiar with it, here is a primer from a blog post at Medium.com

https://medium.com/pm101/how-you-can-apply-the-80-20-rule-in-your-life-and-work-7d094a78e136

The 80/20 rule is also known as the Pareto principle or the law of the vital few, which basically means that in many events 80% of the effects come from 20% of the causes. The Pareto principle name came from the Italian economist Vilfredo Pareto who discovered the principle after realizing that approximately 80% of the land in Italy was owned by 20% of the population, and he kept observing the same pattern in other different situations.

Vilfredo Federico Damaso Pareto was born in Italy in 1848 and became an important philosopher and economist. After his realization of the 80/20 pattern, Pareto started to think about uneven distributions and discovered that different industries also followed the same pattern when the generalization became a universal truth.

The Pareto principle or 80/20 rule is the universal truth about the imbalance of inputs and outputs. You don’t need to create mathematical formulas, do some complex math, or understand statistics to leverage the 80/20 framework and start using it in your daily work.

The main point is to find the small things that give you the biggest results.

The key principal of the DTM5 strategy is to determine if an investment has ‘Merit’. Now, I’m only one person. I borrow the resources of others (research, opinions). I have some substantial experience in business and investing. I utilize technology for both trading and research efficiently. But, at the end of the day I only have so much time and one brain to work with. So, I have to choose my battles carefully – ie. Do the 20% that will get me 80% of the results!

So this is a deeper dive into the DTM merit process. This is my 20%, my ‘vital few’. By using these I believe I get 80% of what I need to know to make a decision about an investment.

But first a caveat – Before I do the Merit dive I like to ask a couple questions about a company I’m looking at.

1. With a quick look, do I understand the company and business model?

2. Is the company in a sector that has strong potential or in a secular growth trend?

If the answers are ‘yes’, I can start to determine Merit.

Here are the areas I look into to determine Merit, with comments italicized

Balance Sheet Health
Debt level and structure	Low / no debt
Liquidity / Working Capital	Good WC levels
Shareholders Equity	Very strong price book ratio
Capital structure
Shares OS	Fewer the better. Tight and smart.
Debt	Smart debt financing, not desperate
Ownership	Meaningful management holdings
Cash Management
Cash Runway	Operationally funded or smart financing capability
Cash Flow	Positive or realistic path to positive
Expense Structure	Aligned with Cash flow reality
Management Comp	Aligned with shareholders
Management
Experience and Credibility	Industry relevant, valuable to company
Operators or Opportunistic?	Been there done that vs seagulls smelling food
Operators or Bankers	True Entrepreneurs vs. Money chasing middlemen
News
Market communications?	Professionalism vs Amateur
Credible vs promotional	Material News vs. Distracting Noise
Pumping	Shouldn’t be necessary, ever

So, what information sources do I use? MD&A statements, financial statements, insider transaction reports, news releases, management bios, company websites, published research reports (both institutional and amateur).

Now a company doesn’t have to be ‘perfect’ to consider an investment. Some items are more important than others. But, on the whole, I find this merit process gives me a good solid overview of the company and whether I should put it on the DTM5 bench.

And, even if a company is perfect in every regard, it doesn’t mean the DTM5 will make an investment. If it can’t be bought at the right time and price, there is no point in owning it. Remember – I’m hunting for bear here and I want to achieve a very high rate of return. Timing and price are critical components of that.

GLTA!