Following on from the discussion of my first investing checklist, it’s time to reveal my new investment checklist.
Rather than a checklist of yes/no answers, the new checklist focuses on sets of core to do tasks with the real checklist being only a handful of questions in the “Final Evaluation” section.
I’ve also made it visual so that it makes it quicker and easier to follow. Rather than having a checklist of 100 items thrown at you, having a flow chart will make it easier to manage and keep track of what stage of the investing process you are on.
Investment Checklist Flowchart
Core Investment Checklist
Here is the text version.
Do the Pre Work
Preliminary Background Reading
- Read previous thesis on Blogs / Investing Sites / Forums / Alerts
- Read news headlines
Valuation
Financial Statement Analysis
- Go through line by line
- Income statement + competitive advantage analysis
- Balance sheet + competitive advantage analysis
- Cash Flow statement + competitive advantage analysis
- Quality of Earnings (Inventory, tax, EPS)
- Competitor comparison
- Verify 15 value investing metrics and ratios
- Discounted Cash Flow/ Graham’s Value/ Earnings Power Value/ Multiples/ Sum of Parts
Dirty Work
- 2 annual reports
- 3 quarterly reports
- specific attention to footnotes at the end of the report
- managers discussion – consistency, candidness
- 2 letter to shareholders
- compare words, numbers to annual report numbers
- Latest proxy
- CEO compensation (% of sales)
- Greed factor (bonuses, reimbursements, planes, boats, family donations)
- Insider ownership
- Search CEO history, track record, personality
Emotional Check
- Write down how you are feeling
- Beware of
- wanting to just buy and study later
- hindsight bias
- overconfidence
- obligation to buy due to amount of research
- reluctance to accept differing opinions
- social proof bias
- If required, take a break and clear your mind. Get away from the excitement and noise.
Final Evaluation (the only checklist you need at this point)
- What can go wrong?
- What are the risks? How likely are the risks?
- How can you lose money?
- How would you categorise this investment?
- How attractive is this idea compared to the other holdings? (There can only be ONE best idea. Not 2 or 3.)
- What is the expected holding time frame?
- What should be the portfolio sizing?
- What price will you sell?
