By now you know why I built this system and the principles behind it. This piece is about what it actually examines when it sizes up a company.
What makes it work isn’t the cleverness of the questions, it’s that every company gets asked all five, scored the same way, every time. No exceptions, no favorites, no getting talked into a story.
Here are the questions it asks before a single dollar is ever committed.
1. Is this a sound business?
Before price, before momentum, before anything: is this a quality company, or a shaky one wearing a nice suit? A great price on a failing business is still a failing business. So the system starts here: does the company earn strong returns on the capital it puts to work, is the balance sheet solid rather than propped up with debt, does it earn its keep year after year. This question comes first for a reason: get it wrong and the other four don’t matter.
2. Is it priced sensibly?
A wonderful company can be a terrible investment if you overpay for it. So the second question is about value: am I paying a fair price for what the business actually delivers, or buying a story the market has already fallen in love with? The system leans on cash flow rather than accounting optics, which keeps it from chasing names that are expensive just because they’re fashionable this quarter.
3. Is it moving in the right direction?
Markets reward strength, and a falling knife has a way of finding new lows. So the system pays attention to direction, both the stock’s and the business behind it. Is the market voting for this company, or against it? The principle underneath: don’t stand in front of a freight train, and don’t sell something just as it’s hitting its stride.
4. Is it growing?
A business standing still is quietly falling behind, because everything around it keeps moving. The fourth question asks whether the company is actually expanding what it earns and what it brings in, because over the long run, that expansion is a big part of what pulls a stock higher. It’s deliberately weighed against value, so growth is never bought “at any price.”
5. How much risk am I taking to own it?
Two stocks can deliver the same return while one puts you through a white-knuckle ride and the other lets you sleep. The last question is about that ride. Specifically the downside, how a stock behaves when things go wrong. All else equal, I’d rather get there calmly. This ties straight back to the first principle: avoid the disasters.
Those are the five questions. Here’s what sits behind each one — the actual inputs the system measures. In the live version, you can use the market-regime toggle buttons to see how it shifts its emphasis as conditions change, leaning toward offense when the market is healthy and toward defense when it isn’t.
Why five, and why together
None of these questions wins alone. A company can look dirt cheap and be a sinking business; it can be a magnificent business at an absurd price; it can have roaring momentum and no earnings underneath it. The system’s job is to weigh all five into a single, consistent read, so it’s never seduced by one attractive number while ignoring the rest.
Picture two companies in the same industry. The first is cheap and rising fast — but the discount exists because the balance sheet is deteriorating and the growth is borrowed. The second is only fairly priced and climbing steadily — but it earns high returns on its capital, carries little debt, and behaves well when the market gets rough. On a one-number screen the first stock might scream “buy.” Run both through all five questions and the picture flips: the cheap one is cheap for a reason, and the sound one is the position that lets you sleep.
Everything is judged in its own neighborhood
Here’s the piece most screens get wrong. The system doesn’t score a company against the entire market. It scores it against its own sector.
The reason is that the five questions mean different things in different corners of the market. A utility grows slowly and carries a lot of debt by design. Judged against a software company, it looks broken. A bank’s whole business is leverage; judged by a manufacturer’s balance-sheet standards, every bank on earth fails. Compare a REIT’s valuation to a chipmaker’s and you learn nothing. So the system grades on a curve, by neighborhood: a bank against other banks, a REIT against other REITs, each company ranked within its own sector. A top score doesn’t mean “good by some universal yardstick.” It means “near the top of its peer group on this question.” That’s what makes the numbers comparable across a portfolio that might hold a bank, a REIT, and a chipmaker all at once.
When the system can’t answer honestly
One more piece of the discipline: if the system can’t answer a question honestly – if a company is too young or the data is incomplete – it doesn’t paper over the gap with a guess. That company simply steps aside until there’s enough to judge it fairly. I would rather show you nothing than a confident-looking number built on air.
What I’m not showing you
How I measure each of these questions, how I weight them against one another, and how the five scores combine into a final verdict – that’s the engine, and it’s the part I’ve spent years refining. I’m glad to show you what the system looks at and how it behaves, which is what this page has done. The exact formulas stay under the hood, as they should. That’s the part that makes the whole thing so valuable, and the reason the system reaches conclusions you won’t get from a free stock screener.
In the next piece, the question you’ve been waiting for: does this actually work (and how do I know)?
— Erik Conley