If you read any great investing books you’ll come across an extended investment checklist. Lynch had his simple philosophy. Fisher had fifteen points. And Graham had his portfolio policy and value formula. Even Buffett and Munger talk about keys to a great company.
The idea of a checklist isn’t new. It’s used by a number of professions, like engineers, pilots, and doctors, to prevent mistakes. There’s a reason every flight seems like a ritual. Both pilots and flight attendants go through a checklist before, during, and after each flight.
As a passenger it seems trivial, but they do it for a reason. It works. It makes sense too. Lives are on the line and anything that prevents errors and mistakes, inevitably saves lives. And all because of a simple checklist.
You can apply the same concept to your portfolio and investments.
An investing checklist forces you to stay in your comfort zone, stick to your guidelines, and make methodical thought out decisions. It becomes your process for investment selection – lists what you like and should avoid. It is your research process. It is a reminder of past mistakes to avoid. It keeps your portfolio inline with your long-term investment plan. It simplifies your investment process.
With money on the line, being thorough helps reduce risks, mistakes, and losses. It should keep you honest about investment ideas. In doing so, it should increase performance. Though, I won’t guarantee it. But if you’re using your checklist correctly, fewer mistakes lead to fewer losses and better performance. So you do the math.
Investment Checklists
Mistakes are a big reason investors fail. Which should be obvious. It’s how we learn from those mistakes that set us apart. The second biggest is not having a plan. You get around both with a solid checklist.
Here are two investment checklists to get you started. Understand these are generic templates for a number of reasons. But mainly, not knowing your strategy or selection process makes it hard to be specific. So please remove what you don’t need and add your own experiences, requirements, and strategy. It will only help your investing success in the long run.
Portfolio Checklist
Running through a portfolio checklist is a great way to make sure your investments stay aligned with your goals. It keeps your portfolio performing optimally and without extra risks. It’s perfect for quick quarterly checkups and complete annual reviews.
- Have your goals changed?
- Do your investments still meet your requirements?
- Do your investments align with your goals, risk aversion, and age?
- Is your asset allocation out of whack? Is it time to rebalance?
- Is it a diversified allocation?
- Is it a tax efficient allocation?
- Do the mutual funds live up to its stated investment goals?
- Do the index funds and ETFs perform up to the underlying benchmark?
- Have the fund expense ratios changed? More expensive? Less expensive?
- Is there an alternative lower cost fund available with a similar or better performance history and risk profile?
- Have economic changes affected your risk level?
- Has your investment time horizon changed?
- Do those economic changes call for an allocation adjustment?
- Have those changes provided a short-term opportunity?
Stock Checklist
Your stock checklist will solidify your predetermined requirements. It forces you to follow through on all the research. This way you don’t overreach for a stock because your neighbor recommends it and one metric looks convincing. When you build your list, it can be as simple as what makes a great stock or an extension of your favorite stock screen. Again, this checklist is far from complete. You’ll need to make changes and fill the rest.
Basic Info
- Is it a simple business – easy to understand?
- What is the business, products, services, and customer base?
- Is it a “one and done” product or repeat business?
- How does the business make money?
Management
- Does the business have consistently strong management?
- Is management short or long-term focused?
- How is management compensated?
- Is there a stock options plan? Is it diluting shareholder value?
- Is there a high insider ownership?
- Are insiders buying now?
- Is management honest or cagey on conference calls?
Competition
- Is the business a market leader?
- Is it increasing or decreasing market share?
- How does that increase or decrease affect cash flow?
- Who are the competitors?
- How are the competitors performing?
- How is this business different from its competition?
- Is there a competitive advantage?
- What are the barriers to entry?
- Is there brand loyalty?
Value/Pricing
- What is the intrinsic value?
- Based on what valuation method?
- Is the stock fairly priced? Under priced? Over priced?
- What is the margin of safety?
- Are revenues sustainable? Overstated? Understated?
- Are earnings sustainable? Overstated? Understated?
- Are cash flows sustainable? Overstated? Understated?
- What is the profit margin? Rising or falling over the past 5yrs? 10yrs?
- How is the company leveraged? Over? Under? Fairly?
Growth
- What does the company do with earnings? Reinvest? Acquisitions? Dividends? Buybacks?
- Have past acquisitions been successful?
- What are future growth expectations?
- What is driving growth?
- Is growth sustainable?
- Are there R&D or new product pipelines that could propel growth?
Risks
- What are the possible failures?
- What factors, economic or otherwise, move the stock price positively? Negatively?
- Has the business/stock recently been in the news? Why?
- Any short-term catalysts that affected or could affect the stock price?
Reminder
The idea is to build an investment checklist that helps filter out mistakes, errors, and bad investments. This will increase your odds of success so you don’t lose money. In theory you track what works and what doesn’t. So when you come across an investment that performs better than the rest, you can use that as a filter to weed out the bad seeds later on.
As I said, the checklist works when you have experience to draw from. But if you are new, you’re unfiltered so to speak. Mistakes are part of the process. Investments fail. We lose money. Those mistakes become lessons that prevent future losses.
While you learn from your mistakes, take the time to learn from others too. The best investors are great because they learned from their mistakes. Thanks to their high-profile, the media thrives on covering those mistakes. Take advantage of that information. Do it often enough and you’ll build a working checklist.
As you progress, keep track of what works, what doesn’t, mistakes you’re susceptible to (everyone has them), how you avoided mistakes in the past, and what you learned from every investment. In the end, it all goes toward improving your investment checklist over time. Eventually, you’ll hone it into a solid, successful process.
