The Art of Saying No: Our Disqualifying Checklist

Invert, always invert.

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger

Most investors start their process by asking, "How much money can I make?" They look for the upside, future possibilities, the next big thing. FOMO moves many investment managers.

At Rhea, we start by asking the opposite: "How could this investment lose money?"

This is the principle of Inversion. Instead of trying to be brilliant, we focus intensely on avoiding mistakes. We believe that if we can limit the losers, the winners will take care of our portfolio. We figure out what we don't want and avoid it at all costs. Like Charlie Munger famously said: “Tell me where I’m going to die, so I’ll never go there.”

Our Disqualifying Checklist

Before we write an investment memo or underwrite an investment, every opportunity must pass through our Disqualifying Checklist. If a company checks one of these boxes, it is eliminated. No exceptions.

We categorize our disqualifiers into four pillars: Business Quality, Management & Incentives, Earnings Quality, and Market Dynamics.

Business Quality

• Outside Our Circle of Competence: If we can’t explain how the business makes money in simple words, we lack the edge required to own it.

• No Durable Moat: Without switching costs, brand power, or network effects, we are not interested.

• Commodity Product: Competing purely on price.

• New or Changing Industry: We avoid latest trend investments because we cannot predict the future. Competitive dynamics in new industries move too fast for long‑term compounding in our opinion.

• Short Product Lifecycles: If a company has to reinvent its revenue stream every season or year (like fashion, media, etc.)

• Growth by Unrelated Acquisition: If a company purchases unrelated businesses because they can or because they want to grow their size for the sake of it.

• Heavily Reliant on one client/provider: Companies that rely heavily in one client or provider.

Management & Incentives

• Insufficient Skin in the Game: We look for Owner-Operators. If management doesn’t own a meaningful percentage of the equity, we avoid it.

• Low Integrity Behavior: High corporate costs, overly complicated management structures, and excessive management perks.

• Incentive Compensation: Bonuses based on growth without regard for Return on Invested Capital. If management gets paid to grow at any cost, we’re not interested.

• Key-Person Dependency: Having an autocrat or star founder with no bench or systemized company culture.

Earnings Quality

• Fragile Economics: We demand high and stable ROIC (Return on Invested Capital). If the business destroys value as it grows or the growth is not reliable longterm we avoid it.

• Financial Engineering: Complicated financials, off balance sheet transactions, or constantly changing reporting metrics are things we run away from.

• Weak Balance Sheet: If the company has high levels of debt or if leverage is needed to make returns look acceptable.

• Adjusted Earnings: We ignore EBITDA and focus on Owner Earnings which for us means Net Income plus non-cash expenses (amortization and depreciation) minus maintenance capex.

• Capital Intensity: We avoid businesses that require constant, massive reinvestment just to operate.

Market Dynamics

• Adverse Selection: If we are buying from someone who knows significantly more about the business than us, (e.g., a PE firm, family operator) we are very wary of their motives of selling.

• Market-Dependent: If the investment thesis requires guessing where interest rates or the macroeconomy will be in the future.

• No Clear Exit Path: We must know how liquidity is eventually realized (for private companies), whether through dividends, buybacks, or an eventual sale.

• Ephemeral Information: We do not consider or analyze short term news or events. We focus on tendencies and information with a long shelf life, things that will probably not change in the near future.

• Short-Termism: Investing because the company had a good quarter or there is an arbitrage opportunity to make a quick buck. We focus on the long game.

• Over-Diversification: Investing less than 2.5% of our book value. We do not tiptoe into an investment. If we like it, we invest with conviction.

The goal isn't to pick winners, but to eliminate losers. By clearing the clutter early, we avoid unforced errors and free up our time to look for the quality businesses worthy of long-term ownership.