Peter Pronovost noticed a problem. He was a doctor at Johns Hopkins Hospital in 2001. He found that arterial line infections occurred at a higher rate than expected, which led to illness and, in some cases, death in patients. Pronovost aimed to change that.
He started with a simple checklist. Just five steps to reduce the chance of infection:
- Doctors wash their hands with soap.
- Clean the patient’s skin with chlorhexidine antiseptic.
- Cover the patient with sterile drapes.
- Doctors should wear a mask, hat, gown, and gloves.
- Place a sterile dressing over the catheter site after the line is inserted.
5 simple steps doctors have known since medical school. It was almost too simple. Pronovost found, through a month of observation, that at least one step was skipped in over a third of patients.
Pronovost then pushed hospital administrators to add a verification process. Nurses were asked to stop doctors anytime they skipped a step in the checklist. Then he sat back and observed for a year.
The results were so unexpected that he expanded it for another 15 months. The checklist prevented 43 infections and 8 deaths, the infection rate dropped from 11% to 0%, and saved the hospital $2 million.
In 2003, Pronovost took his checklist on the road. He introduced his 5 step checklist to hospitals in Michigan. The results were published in 2006. Infection rates dropped by 66%, below the national average, within the first three months. Over 1,500 lives were saved and reduced hospital costs by almost $200 million after 18 months.
Doctors, despite their advanced medical knowledge, are still susceptible to human error. And in the chaos of an ICU, sometimes mundane tasks get overlooked.
Pronovost’s simple checklist started with the successful end goal and worked backward. The checklist created repetition, reminded doctors of what they already knew, and set a minimum standard of performance. In turn, errors dropped dramatically.
Investing, while not so life-threatening, has a similar human error problem. Our emotions and biases can lead to wrong decisions, mistakes, and debilitating losses. A simple checklist may be the solution:
Perfection is unattainable, so most of us are best off minimizing regrets with a negative checklist. Avoid a stock if you have the wrong attitude (irrational, short-term gambling); and wrong knowledge — industries, economic statistics or countries that you don’t understand well enough to make a valid forecast. Also if the company has the wrong management (crooks and idiots); wrong businesses (ruined over time by obsolescence or commoditization); and wrong price, where future cash flows aren’t sufficient or visible. — Joel Tillinghast
Joel Tillinghast’s negative checklist inverts the problem. Instead of looking for great companies, great management, and so on, the checklist avoids the worst of the worst of them.
Don’t understand the company? Skip it. Horrible management? Nope. Overpriced stock with no sales? Pass. Product with no pricing power or brand loyalty? Not interested.
We all have biases and, like the doctors above, skip obvious steps when making hasty decisions that lead to mistakes and losses. The negative checklist creates an immediate “No!” No need to spend time on a company you’ll regret owning later on. That time is better spent studying companies you might regret not owning down the road.
Of course, a similar negative checklist can be applied at the portfolio level for a wider audience. It might start like this:
- Does the investment present lottery-like results — a minuscule chance at a massive gain but most likely permanent loss?
- Is it a “great” investment because you heard about it from social media, TV, a friend, etc.?
- Does the investment have a time limit or require you to “act fast”?
- Is the investment promoted as “risk free,” “sure thing,” or “can’t lose”?
- Does the investment offer an exciting change from your “boring” portfolio?
- Are you only interested because of the investment’s exceptional returns over the past 1 to 3 years?
- Is the investment interesting because everyone you know owns it too?
- Does the investment come with a great story that elicits hope and promise but is devoid of facts?
A “Yes” to any question above, likely leads to regret later on. Best to just skip it.
It’s an incomplete checklist but it’s a start. Feel free to add your own. Still, common biases like recency bias, action bias, myopia, and narrative fallacy are covered. Each one leads to repeated mistakes investors make — chasing returns, herd behavior, gambling, and more.
Those common mistakes add up and put you at greater risk of falling short of your goals. Yet a silly checklist reduces those errors and flips the odds of success back in your favor.
Source:
Veteran of ‘Low-Priced’ Stocks Will Expand His List
Related Reading:
Repeated Mistakes
Investing Don’ts