When looking for ASX stocks to buy, investors are understandably doing so in an optimistic mood.
And that's why often they concentrate on the potential for upside during analysis more than the downside risks.
However, IML portfolio manager Daniel Moore pointed out how sport shows that reducing errors is crucial.
"Novak Djokovic is, probably, the GOAT [greatest of all time] of tennis. Does he hit more winners than other top players? No, not particularly. But he makes fewer mistakes."
Last January, on his way to winning the Australian Open, Djokovic hit 20% more winners than his opponents. But it was the fact that his opposition hit 40% more unforced errors than The Joker that propelled him to the trophy.
"Novak's low error count is a key part of his incredible, enduring success. It might not make him popular, but it makes him a winner," Moore said on the IML blog.
"Don Bradman, the GOAT of cricket, only hit 6 sixes throughout his storied career – if you don't hit it in the air, you can't get caught out."
This is how you evaluate downside of an ASX stock
So how do you check the downside of ASX stocks before you buy them?
Moore laid out six checks that his team performs:
- Cyclicality of earnings
- Balance sheet
- Management track record
- Financial accounts
- Regulatory risk
- Valuation
Cyclicality refers to whether the earnings are currently on the way up or down.
Balance sheet and financial accounts sound similar, but are distinct items to check.
The former is whether the business can "withstand a downturn in the economy or might it need to raise equity and so dilute the investments of current shareholders".
The latter is the question of how transparent management is with its reporting.
"Are there any concerning issues buried deep in the accounts?"
Moore added that the best investors are the ones who can control their "emotions and biases" as much as analytical ability.
"A lot of avoiding big losses is ensuring that you are in control of your own emotions, that you don't get caught up in the hype. That you don't fall for fads or FOMO."
