Many great practitioners across a number of disciplines have professed admiration for a thorough checklist. Some notable investors who are in this camp include Warren Buffett, Charlie Munger, Michael Mauboussin and Mohnish Pabrai. There are many reasons to like a good checklist, for it's a great means through which to impose self-discipline and to leave no rock unturned in your analysis. Humans are constantly exposed to the perils of behavioral biases and checklists are the best method I have encountered to help combat human misjudgment (see some of my lessons learned from the Santa Fe Institute on Risk: the Human Factor).

Some people use checklists with binary (yes/no) questions, while others look for more thought-out analysis for each element. I have combined a little bit of both, with the aim of constructing a coherent and thorough basis for each investment I undertake. One of my goals in posting this checklist here is to elicit feedback from some of you readers out there on other elements that may be helpful, particularly in the qualitative areas.

The Company:

1. Can I say what the company does in 1 sentence?

2. Do I understand the product and the target market?

Valuation:

1. What is the stock price today implying about future expectations? WACC? Growth?

2. What is the preferred method for valuation (or combo of methods)? Earnings power value? DCF? SOTP? Franchise value?

3. What is a reasonably conservative Earnings Power Value? With Growth?

4. How do the company’s ratios compare to their competitors? Market on the whole?

5. Is there a readily identifiable reason for why the stock is cheap?

6. What are the company’s ROE/ROIC like? What are the trends over time?

7. Does the company have operating leverage to grow earnings quicker than revenues?

8. Has intrinsic value been increasing regardless of the direction of the stock’s price?

9. Is the company’s ROIC greater than its WACC? 1 yr, 3 yr?

10. What does the MICAP say about the duration of expectations?

11. Is the company’s capital investment increasing or decreasing? What is the trend in returns on invested capital?

Balance sheet:

1. Is the company well capitalized?

2. How is its debt-to-equity compared to industry norms?

3. Is debt less than stockholder equity?

4. Is long-term debt less than 2x working capital?

5. Are there any hidden assets I should take note of? How can these assets be valued? What are they worth?

Management:

1. How is managements track record with capital allocation?

2. What is management’s track record with options?

3. Is the incentive structure of management aligned with shareholders? Is management “overpaid”?

4. Does management manage for quarterly earnings, or are they long-term oriented?

5. How does the company use its excess earnings? Dividend? Buybacks? Invest in growth? Build cash balance?

6. How did present management come to lead the company?

7. Does the CEO have a passion for the business? Or the money?

Competitive Dynamics/Qualitative Factors:

1. Does the company have a moat? Is the moat growing or shrinking?

2. Does the company have a sustainable competitive advantage? If so, what is its source? Is there a structural/cost advantage? Switching cost? Brand loyalty?

3. Does the business have pricing power? i.e. can they raise prices without losing customers?

4. Is the business cyclical? If so, where in the cycle are we?

5. What is the company’s sector like? Is there any chance the core business is a bubble? Has regulation or subsidies contributed to sector strength?

6. Is this a capital-intensive business? What are the capital turns like?

7. What type of relationship does the company have with its suppliers?

8. Does the business generate recurring revenues? Or is it one-off transactions?

9. Is there a readily identifiable mental model that comes to mind with the company?

10. Does the company have a strong brand? Do customers have an emotional connection to the brand? Does the brand imply a social status?

11. Does the brand increase willingness to pay?

12. Do customers trust the product because of the name?

13. What’s the likelihood of a disruptive innovation in the core market? Where would it come from? Who would make it? Are any currently being funded?

14. What share of the industry’s revenues does the company earn? What share of the industry’s profitability does the company make? How has the distribution of economic profit changed over time in the industry?

15. Is capacity in the industry increasing or decreasing?

16. Is there a high degree of differentiation in products between competitors?

Growth:

1. What are the future growth prospects like for the business?

2. Are secular forces a tailwind to the company’s growth? If so, what are the driving secular forces?

3. Does the business grow organically? Through competition? Or Both?

4. Has historical growth been profitable?

5. Does management have a patient or rushed plan to pursue growth?

Ownership:

1. Are there any large institutional holders? If so, are they “likeminded” to our strategy?

2. Are large holders buying or selling?

Catalysts:

1. Are there any readily identifiable catalysts for the company?

2. What is the expected duration for our holding period?

3. Is the 3-5 year outlook better than the 6 months-1 year outlook?

Risks:

1. What are the primary risks to the business’ profitability?

2. What are the risks to our thesis on the business?

3. What’s a low-end valuation assuming everything goes wrong?

4. How does the macro environment influence the company’s fundamentals?

Technicals:

1. Is the stock in an uptrend? Downtrend or sideways? How long has the prevailing trend lasted for?

2. How has the stock performed relative to the market over the past 6 months, 1 year, 3 years and 5 years?

3. How has the stock performed relative to its peers?

4. Is the stock “in the gutter” and if so, for how long?

5. Has the stock recently violated a trough in “the gutter”?

Behavioral:

1. Can I afford to wait?

2. Are there identifiable sellers for uneconomic reasons? i.e. forced selling

Investment Checklist