We started a thread a while ago for our investors to discuss the investment checklist. We will create a page where users can set up their own checklist, and data in our databases will be used for users to verify each item in the checklist.

This is the thread we had about the checklist: http://www.gurufocus.com/forum/read.php?2,24972. We also had a related discussion: What are the positive signs of a stock?

Interestingly, Jeff at Circle of Competence blog found an interesting article called The Checklist on the blog Street Capitalist. The piece, from the New Yorker, was about a doctor who, through the use of checklists, was able to dramatically improve the critical care unit of Johns Hopkins Hospital.

According to Jeff, One of Charlie Munger’s most elementary pieces of advice for investors and thinkers is to utilize checklists when ever possible, as a way to improve cognitive ability and minimize errors. In a 2003 speech to UC Santa Barbara Economics, Munger put it thusly:

You don’t have just a hammer. You’ve got all the tools. And you’ve got to have one more trick. You’ve got to use those tools checklist-style, because you’ll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need it. But if you’ve got a full list of tools, and go through them in your mind, checklist-style, you will find a lot of answers that you won’t find any other way.

This is what we come up with in the last discussions about the investment decision checklist. Please feel free to comment and add the items that you think are important.

First of All

Is this a good business? Is this a simple business? Is there something that cannot be understood in the business operations, financial instruments?

Business Climate

Is this a cyclical business? Where is it at the business cycle of the industry? What are the macro-trends affecting the company? What is the economic outlook for the companies industry? What will recession do to the business?

Growth and Competitiveness

Will the company be around in 20 years? Will (will, not should) earnings and sales and the dividend grow over 5 years? What's their competitive advantage and moat? Have sales historically increased annually? Is the company doing something that is unconventional for their business? Does the company focus on short term profit and forget the long term viability of the business? (sub-prime loans are examples) Where is the company at in its growth cycle? Does the company have a moat or durable competitive advantage?

Management

Who are the founders/BOD, what other companies have they been involved in, what are their credentials/biographies? Are they shareholder oriented? Are they buying shares lately?

High Quality?

Good return on equity? Recent Guru buying

What is the downside risk

What is the debt level of the company? Is it increasing or declining?

Is the business predictable? What is the predictability of the business?

Does the business have enough moat to maintain its profitability?

Valuation

What is the earning yield? Is it undervalued? What is the valuation of the company? What is the margin of safety? If DCF applies, what is the valuation? Why is this company undervalued? Is this reason likely to get worse before it gets better?

Level of Confidence

If the share price went down by 50% the day after I bought, would I immediately worry about having made a mistake, or would I buy more shares? Is this a speculation? What percentage of speculation is there with this idea? What is the level of confidence we have?

Please add your comments and checklist items here.