Investing Checklist
10 minute read
The following is the checklist I use before making an investment.
The purpose of this checklist is to help me stay disciplined, and avoid making mistakes.
This checklist will evolve with time, my plan is to update it as I study the failures of super investors. “All I want to know is where I am going to die so I never go there”. – Charlie Munger
I hope it can be of value to you.
Personal Psychology
Are you tired?
“You shouldn’t make a lot of important decisions when you’re tired and that making a lot of difficult decisions is tiring.... I cannot remember an important decision that Warren has made when he was tired." –Charlie Munger
Are you making this investment decision while the market is closed, so that current price moves aren't impacting your judgment?
Do you feel pressure to act because you have not found an investment idea in some time? (do-something syndrome)
Do you feel like you need to accept a lower margin of safety because you have not found any opportunity in a while?
Do you feel pressure to act because you have spent a lot of time and effort into analyzing this company?
Although you have not finished analyzing the company, do you feel pressure to invest because the stock price is going up?
Do you feel pressure to act because you have a lot of cash on-hand?
Business Understanding
Have you formed a full image about how the business operates, competes, allocates and consumes capital, takes care of customers?
Have you done enough work, and are you sure this is within your circle of competence?
A business is within your circle of competence is equivalent to understanding how the business will look 10 years from now.
Is the product or service offering of the business likely to change in the next 5 - 10 years?
How does the business look 5 - 10 years from now?
Does the business solve an important problem for its customers?
Is the business vulnerable to technological changes?
Is the business vulnerable to cheap foreign competition?
Profitability
Is this a good business?
It doesn't necessarily have to be a long-term "compounder" type of business, but it needs to provide real value for its customers, clients, etc…. i.e. a Win-Win with all six counterparties (customers, suppliers, employees, owners, the regulators, and the community).
Does the business produce free cash flow?
Is this business almost certain to be making more money 10 years from now, and can it increase its long-term value in a tough economic environment?
Valuation
Is the business an obvious bargain at the current market price?
Is there at least three times more upside than downside? (e.g. If downside under a worst-case scenario is 50%, I need at least 150% [2.5x return] upside.)
Why are you confident this an attractive investment opportunity?
How sure are you in the valuation of this business?
Why is the market undervaluing the company?
If the stock market close down tomorrow for the next 10 years, would you be happy owning the business?
Does the value of the business offer downside protection? This will largely come from:
Paying close to (adjusted) net asset value, encompassed within a business that has solid earning power (even if temporarily obscured) and some advantages protecting that earning power, even if it’s within a cyclical business and the size of the moat may be hard to estimate.
A moat that protects a minimum, and conservatively-estimated, level of earnings.
Is it hard to loose money at the current market price?
Financial Health
Is the balance sheet conservative to allow the company to endure—and hopefully take advantage of—even the most difficult of economic environments?
Position Size
Are you sizing the position appropriately? The Marks story, via Peter Bevelin's All I want to know... book:
“It can always get worse than you think. I love this story from Howard Marks: ‘I tell my father’s story of the gambler who lost regularly. One day he heard about a race with only one horse in it, so he bet the rent money. Halfway around the track, the horse jumped over the fence and ran away. Invariably things can get worse than people expect. Maybe ‘worst-case’ means ‘the worst we’ve seen in the past.’ But that doesn’t mean things can’t be worse in the future.’”
Management
Does management have a bad reputation?
Are the interests of management clearly aligned with your own?
Value Erosion
Is the value of the business decreasing each day?
How would an environment of high inflation affect the company?
Will you loose money if the market does not correct the valuation of the business in the near future?