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Award-winning fund manager Randall Dishmon says the way to win at investing is to think like a Warren Buffett-style acquirer. Here are the 3 questions he always asks before buying a stock.

FILE PHOTO: Berkshire Hathaway Chairman Warren Buffett (L) and Vice Chairman Charlie Munger arrive to begin the company's annual meeting in Omaha May 4, 2013.   REUTERS/Rick Wilking
  • Randall Dishmon runs the rare mutual fund that's in the black this year, and it's outperformed the market for more than 12 years under his management. 
  • Dishmon says he's achieved that success by thinking like an investor who wants to shape a company's direction, like Warren Buffett or Carl Icahn might. 
  • He shared three questions he always asks about a potential investment. They're focused on the long-term worth of the company and not the narrower question of whether it's stock is trading at a discount.
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Anyone who has made money in this difficult year is worth listening to — but it doesn't hurt if they have a longer track record supporting their case.
Take Randall Dishmon. His Invesco Oppenheimer Global Focus Fund is having a sterling year in 2020, netting positive returns when the broader market is down about 12%. It's even erased most of the losses it sustained in the coronavirus sell-off.
Dishmon has run the global focus fund for more than 12 years, and it's crushed its benchmark and category since its inception. Along the way, he's received Refinitiv Lipper Fund Awards for the fund's three-year performance through 2010 and its five-year performance through 2013.
He credits his performance to lessons learned from investing legends like Warren Buffett, as well as famed activist Carl Icahn.
"They're not dabbling in buying stocks and holding a minor piece quietly," he told Business Insider in an exclusive interview. "They're control buyers, and you never hear any of the control buyers talk about, 'Well the (price to earnings ratio) was 10, and it outgrows the market, so the P/E should be 12 and therefore I'm going to make money."
Dishmon notes that an investor who buys a stock based on a price measurements like price-earnings ratio (P/E) is making a bet on market sentiment. That can be influenced by a huge variety of factors outside of the company and the investor's control, and even if the company performs well, it might not turn out favorably.
"(Most investors) build market sentiment into their valuation, and I think that's a huge mistake. I see it all the time. You never hear control buyers talk about P/E," Dishmon said. "They talk about cash flow."
So he tries to approach every potential investment the way Buffett or Icahn might — focusing on the company cash flow they will use to pay themselves after they make their investment. He says that's a better way to focus on the performance of the company's business and not its stock.
With his eyes fixed on that target, Dishmon says he asks himself three Buffett-inspired questions about every potential investment, and explains how aspiring investors can learn to figure out the answers.

(1) Is it worth buying at any price? 

The first step in his process involves thinking about the company dispassionately and not searching for a deal or an edge. Dishmon says he wants to know if the company has sustainable advantages that make it attractive to own for a long time.
"Does this business have an advantage that's durable and long lasting enough that it can earn a good return over over many years, over many business cycles?" he asked. "They will have good margins. They won't be price takers, they'll be price setters. They tend to generate enough cash to fund their own growth initiatives."

(2) What's the right price?

While he's always looking for stocks that are trading at tempting discounts, Dishmon says he pays little attention to price metrics because they have more to do with sentiment or market euphoria or fear than the health of the business itself.
He contrasts that with cash flow, which he considers the pulse of the business — the simplest, most basic indicator of whether it's healthy or not. That makes it the key to the second — and most important — question. 
"I can look at an operating cashflow statement over, say, five to six years, and I can tell you just that quick, is this business basically healthy are good things happening here, or is this business basically unhealthy," he said. "Cash flow doesn't really know if you're in a bull market or a bear market. Cash flow is the result of business reality."
Once he's determined what the business is worth, Dishmon says he wants to make sure he's getting it for less than it's worth — because that's the only way to account for the uncertainty and potential losses that come with making an investment.

(3) Does it have the right people?

Investing in a stock means betting on company leaders who will have their own strengths and weaknesses. So Dishmon wants to find management with a track record of success and a history of making choices that are good for the company its investors. Without that, the work he's done could be wasted.
"If I find a great business and I can get it at a great price, but they're either bad capital allocators or they're overpaying everyone involved other than their shareholders ... then I'm not going to benefit from what I've found," he said.
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