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JohnCLeven (30.49)

Do you have an investing checklist?



July 29, 2013 – Comments (2)

Many investors utilize checklists to help filter investment ideas. Despite the wisdom from Mohnish Pabrai, and other investors, up until today, I had never really made a proper checklist. However, after reviewing my notes from Whitney Tilson's new book "The Art of Value Investing", I finally decided to give it a go. 

I'd love to hear what you guys think of my checklist, and investing checklists in general.  

If any of you Fool's have checklist of your own, and are generous enough to share them, I think that would be a great way to learn from each other.

Reviewing my own checklist makes it abundantly clear how often I stray from the principles that I try to adhere to. Both my real investments, and CAPs upthumbs would probably have done a lot better if I actually followed the checklist. I'll try to improve on that in the future.

Well here's my initial draft of a checklist, and I look forward to hearing what you guys think, and what your own checklists look like.



The Checklist 

Mouthwatering Economics

1.       Has this business maintained unusually high returns on capital, equity, and tangible assets, over the past decade?

2.      Does this company have the ability to keep deploying new capital, at high rates of return, for the next 5 or more years?

3.      Does this company have too much debt?

4.      Is this company too capital intensive?

5.      Is the balance sheet strong?

6.      Are earnings and cash flows consistent and growing? 

Durable Competitive Advantage/ Economic Moat

7.      Since this company has maintained high returns, it will be the target of intense competition. What durable competitive advantages does this company have, to fend off that competition? (Ex: indispensible brand, economies of scale, pricing power, high barriers to entry, high switching costs, network effect

8.     Is this business model simple and consistent? (Could a ham sandwich could run it?)

9.      Has this business been successful over a period of multiple decades, or is it a fad?

10.  Has this company been disrupted by new technology over its history, and/or is this company subject to technologic disruption in the next 5-10 years?

11.   If a bunch of smart businessmen had $50 billion, and the singular goal of running this company out of business, how successful would they be? Could they kill or severely maim this business? 

Circle of competence?

12.  Do I REALLY understand this company’s products and brand?

13.  Do I really understand the key drivers of this businesses success or failure, going forward?

14.  Do I really understand this company’s industry dynamics, and competitive position within it?

15.   Can I state the bear case BETTER than the bears?

16.  And can I soundly disprove that bear case? 


17.   Is management able and consistently transparent?

18.  Are management’s interests properly aligned with shareholder’s interests?

19.  Has management’s previous history of capital allocation been above average? (consider dividends, paying down debt, internal investment, acquisitions, buybacks) 


20. Most great investments are made by going against the mainstream. How am I being contrarian?

21.  Am I really smarter than the market? Or is the company cheap for a good reason?

22. What is my brain doing to trick me into making an irrational decision?

23. If the market closed for 5 years, would I be ok with owning this company during that time?

24. “If you've been playing poker for 30 minutes and you don't know who the patsy is, you're probably the patsy. Am I the patsy?


25.  How attractive is the price, relative to the value that I am getting in return?

26. If you back out the net cash (debt), how does that impact the price/value proposition?

27.  Am I sure that I’m not overpaying? (cross reference a variety of valuation ratios, and a reverse DCF, under a variety of conservative growth assumptions)

28. Why is this company selling at an irrational discount?

29. What if I’m wrong? Is the risk of experiencing a permanent loss of capital on this investment extraordinarily low?

30. Is this the best new buy idea I have? (If not move on to the better candidate)

31.  Is this opportunity more attractive than the holdings I already own? (If not, would I just be better off buying more of what I already own?)

32. Even if this is a great idea in relative terms, is it also a great idea in absolute terms? Or would I just be better off holding cash? 

I also started working on a checklist to refer to when considering selling or checking up on a holding:  

Maintenance/selling checklist

1.Has my thesis played out?

2.Has my thesis been proven wrong?

3.Has my estimation of future returns been significantly reduced due to an increase in the share price, relative to intrinsic value of the business?

4.Have the fundamentals broken down?

5.Do I have a much better idea? Which would be a much better place to put my capital to work?

6.Considering the tax implications and transaction fees, is this new buy idea still significantly more attractive than the position I’m considering selling?


If you made it this far, thanks for reading! I'd really appreciate any feedback, or insight as to how you go about the selection process.


2 Comments – Post Your Own

#1) On July 29, 2013 at 5:29 PM, constructive (99.97) wrote:

Great stuff, thanks for posting John.

One thing that might be helpful would be quantifying the range of upside and downside, either in total or annual terms.

Also "How does this fit into my portfolio? Will it make my portfolio more or less cyclical? Will it make my portfolio more or less diversified by sector and geography? Will it make my portfolio more or less illiquid and volatile?"

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#2) On July 30, 2013 at 12:05 AM, awallejr (35.54) wrote:

As for Mega's additional metrics, I actually do consider those as well as many you listed.

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