Discipline

Am I thumb-sucking?! (some elaboration here and here)

Rebuild the history and the profile of the company

Filings and public information

5-10 years of public announcements (financial reports, proxy statements, annual reports, tax filings)



Differential analysis: what mgmt said in one year vs what happened in the next year; things said in different statements



Recent new releases



Industrial or government data and statistics

Scuttlebutt

Competitors, suppliers, customers and products



Media coverage of company and mgmt



Court cases?



Background check: mgmt, accountant, lawyer, cross-holding parties

Financial Quality

Debt Health

Interest cover



Debt-to-asset and debt-to-equity ratios



Maturities and covenants of loans. Fixed interest or floating?



Off-balance sheet liabilities? (e.g. operation leasing, subsidiaries) VIEs?



Capital structure



How open are the debt markets?



Dependent on credit rating (which will put constraints on minimum equity)?



How is the financial health implied by the yield on the bonds and preferreds?

Cash Liquidity Health

Quick Ratio

Profitability

Predictable long-term earning? What are its 10-year average earning and FCF?



ROE



Segment mix and margins



DuPont analysis: Cash conversion rate x Net Margin x Asset Turns x Gearing = Cash ROE



DCF if it's a runoff business or products with a defined lifetime (e.g. drugs with patents)

Assets

Mindful of the difference between liquidation value vs going-concern value



Book value, NTA, NCAV



Hidden values



Properties, LIFO inventories, uncapitalised "intangible"assets





Tax sheltering, semi-permanent accrual-vs-cash discrepancy





Depreciation & amortization

Operational efficiency and asset efficiency

Cash Conversion Cycle = Receivables Turns + Inventory Turns - Payable Turns



Capex vs Depreciation

Capital Allocation

Cash used in financing over the years

Optionality

Ability to raise capital or issue debt

Insider

Executive compensation & options, perks



Related parties?



Insider ownership

Business Quality

Business understandable? Corporate structure understandable? Capital/debt structure understandable? (How thick is the annual report?)

Are the customers happy with the products enough to leave some cash crumbs on the table?

Competitive advantages and competition landscape

Can I comfortably say how the industry/business will look like in 10 years?



Moats / Porter's 5 Forces / Barrier to exit



Concentrated clients or suppliers?



Pricing power - can the company easily raise price by 10%?

What is the megatrend? What's the macro business environment?

Counterparty risk

e.g. Will customers default? Are the clients struggling? Are the clients making money?

Management integrity? Irrational motives?

Does the management show candor in its communications over the years?



Institutional imperative? (some elaboration)

Where will growth come from?

How does capital allocation look like?

maintenance capex



dividends, acquisition, share buyback, capex expansion



Chance of capital raising?

Only one hurdle to jump? Is the difficulty the company facing temporary?

industry-level recession, market over-correct, one-off management mistake, war, one-off restructuring cost, out of favour

Any catalysts?

Does the company have enough staying power while we are waiting for the value to realise?

Safety and Opportunity Cost

Do I have enough downside protection and margin of safety?

How does the business score under these metrics:

Cheapness - Quality - Growth - Capital Allocation

Pre-mortem: what can go wrong?

Why is the other side selling? Why is it cheap?

Remember the market is usually right. Where is my edge here?



Short interest? What are their theses? Short money is smart money.

Not the right pitch? Wait for next pitch?

Is it a mediocre idea?



Would I buy the entire company?



Do I compromise my margin of safety or the quality/depth of my research because of lack of patience?



Is it a too-hard basket case?





Should I keep cash instead? Time is on my side.



Should I wait for more evidence or better price?

How does it compare to my previous best idea, cigarbutt or quality business?

Can I say my primary reason to invest is because the business itself is undervalued?

Does any measurement or figure look too good to be true?

How does it compare to industry average?



Fraud??

Recheck every assumption and every figure.

Portfolio Construction

Correlation with my existing portfolio

Consider other securities for different risk/reward balance: preferred's, bonds, options

Position sizing as per Kelly's Criterion. (some elaboration)

Tax consideration - consider how the value will be realised.

Can my portfolio and my personal cashflow survive a once every one hundred years event?

Is the general market overvalued? (Shilling PE10, Tobin Q-ratio, S&P500 Market Cap vs GNP)

Self Checks

Have I studied the industry and its competitors?

Is my abstract reason backed up by concrete evidence? Or is it just an hypothesis without supporting empirical data?

Do I have tunnel vision? Do I look for evidence only for confirmation instead of invalidation? Can I tolerate non-coherent evidence?

Am I incorporating new information in a Bayesian way?

Am I rushing, losing patience, stressed, over excited? Or is my mood swung by the market direction?

Am I anchoring?

Overconfidence? There is no way to eliminate all the risks. There are always unknown unknowns. Don't overexpose in one position

How would I feel if the stock loses 50%? How would I feel if the stock gains 50% but I haven't bought any shares?

Am I a price taker (red flag!), or a price setter? Should I ignore Mr Market?

Is there any superficial reasoning? I am the easiest person to fool.

Selling

Re-examine the original thesis and fundamentals.

Price/Value should be the primary reason. All other reasons (e.g. pruning, taxation) are secondary.

3 year rule - If visibility is poor, wait for up to 3 years

Should I take profit in cyclicals?

[Last Update: May 2013]

This is the general checklist that I go through each time when I examine an investment opportunity. This is long-winded and generic. This won't be exhaustive enough to cover all the possibilities nor specific enough to cover specific aspects of individual companies. Not all the points are applicable in all cases. Many are open questions of which the answers can mean opposite things in different circumstances.The purpose of having this in place is to avoid silly mistakes, to slow myself down and to minimise the influence of my own emotion, laziness and blindspots. This will be a living document that I'll add or delete points when I have newer insights upon reflections. Utilising a checklist is probably a Mungerism.