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Investment decision checklist
Posted by: gurufocus (IP Logged)
Date: April 8, 2008 04:08PM

Do you have a checklist to make investment decisions? If so, please share with us, and we may generate a new page for users to check before they buy or sell stocks.


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Rating: 2.9/5 (34 votes)



Re: Investment decision checklist
Posted by: kfh227 (IP Logged)
Date: April 15, 2008 04:48PM

Great idea!

1) This is my big number 1! Will the company be around in 20 years? (Crox maybe, JNJ hell yes)

2) Will (will, not should) earnings and sales and the dividend grow over 5 years?

3) Have sales historically increased annually, with maybe a few one year hickups?

4) Has the dividend been increased annually 10+ years?

5) Does the company have a moat or durable competitive advantage?

6) Is the company rated A or better in Value Line? (I used to use B++ or better, but upped it to A or better)

That's a start I guess. The number 1 above is the key point.


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Rating: 2.6/5 (31 votes)



Re: Investment decision checklist
Posted by: John Krantz (IP Logged)
Date: April 18, 2008 11:34AM

1) Where is the company at in its growth cycle? I like to pick young companies with a lot of growth ahead, under 1 billion market cap. (just my personal investment thesis)

2) What is the economic outlook for the companies industry? I like to try to find industries with a bright future instead of ones muddied or with crumbling foundations.

3) PE under 15, little to no debt, no more than 2x book (preferably 1x book or less), ROE greater than PE, greater than industry average ROE. Crude I know, but it weeds out a lot of junk.

4) Who are the founders/BOD, what other companies have they been involved in, what are their credentials/biographies? I only invest in experts with a proven record of success.

5) Why is this company undervalued? Is this reason likely to get worse before it gets better? Does this reason undermine my valuation, or does it gravely affect the future of the company? If so, then I stay away.

6) 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 anxiously await the next paycheck to gobble up more shares? This is more key than anything else. Your subconcious knows more than you think you do, after reading all the financials, etc.

Thats my general checklist.


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Re: Investment decision checklist
Posted by: tkervin (IP Logged)
Date: April 18, 2008 12:20PM

This is a form I fill out on any stock I am looking at. Different stocks will have strength in various areas. The final question is the most important for me.



Stock Checklist-

Stock Name______________________________________________Date_______

Stock Price_________________P.E._______

Under 200 day moving average____________

Moat_____________________

Business risk (not market risk)________________

Good management___________

P.E. lower than industry_____________

P.E in historic low area__________

Peg_____________

ROE____________

ROA____________

ROC____________

Debt/Equity_______

Recent insider buying___________

Recent Guru buying_____________

Downside risk______________________________________

Upside potential (12 months)___________________________

MorningStar fair value___________

S & P target____________________

Value Line_____________________________

Is this a solid company at least 30% undervalued______________



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Rating: 2.7/5 (24 votes)



Re: Investment decision checklist
Posted by: fk (IP Logged)
Date: April 18, 2008 01:26PM

1. don't lose money (buffett)
2. don't forget rule #1 (buffett)
3. is it cheap and safe? ( whitman I believe, but rules 1-3 all are expressions of graham and margin of safety)
4. what's their competitive advantage and moat?
5. is the management good?
6. is management ethical? treat employees, customers, shareholders well?
7. I'm not as strict as buffett on circle of competence, but I want to have that feeling in my gut that I understand what it is about this company that will allow them to do well and have a reasonable moat. It boils down to a few essential things without a need for spreadsheets and complex analysis. For example: in a depression or times of prosperity, people need sugar and water every day, and coca cola is affordable and addictive. example 2: microsoft OS costs 10 cents to print a DVD and they charge 40-120$ per copy, corporate clients are resistant to changing to linux or other platforms and are hooked. Nike: tiger woods, lebron james, kobe. EA: madden football, sims. PM: cigarettes kill, and people know it and keep buying it, smoking up to a pack a day.
8. I'll invest an amount proportional to my confidence level, entry price, circle of competence. I loosely follow the 1/2 kelly formula.
9. I have a % of my portfolio in mind that I'm willing to commit to this company, but I don't buy that position all at once, or necessarily ever reach target %, if the stock appreciates too quickly. I cost average over time.








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Re: Investment decision checklist
Posted by: DaveinHackensack (IP Logged)
Date: April 19, 2008 02:26PM

My checklist is a work in progress, but here's where I am now:

1) Is the stock on the Magic Formula top-100 list, using a minimum market cap of $1 million?

2) Does the company have no net debt (no debt, or more cash than debt)?

3) If the stock has a PEG listed, is it less than 2 (preferably, less than 1)?

4) Is the enterprise value less than 10x forward earnings (if there is a forward earnings estimate; if not, is the enterprise value at least less than 10x ttm earnings)?

5) If there is a Corporate Governance Quotient listed, does the company score better than 50%?

6) What are the macro-trends affecting the company?

a) Is there a macro-trend reason for the company to do poorly over the next year (e.g., it relies on selling to U.S. consumers, it can't pass on high commodity costs, it relies on a securitization market, etc.)?

b) Is there a macro-trend reason for the company to do well over the next year (e.g., it is involved in energy, agriculture, infrastructure, health care, or it benefits from a weak dollar)?

One note: although my preference is for smaller stocks, if possible, often the smallest stocks won't have PEG or forward earnings estimates. In these cases, I've got to be careful that the ttm numbers are sustainable and not the result of an unrepeatable windfall quarter.


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Re: Investment decision checklist
Posted by: DaveinHackensack (IP Logged)
Date: April 19, 2008 02:33PM

John Krantz,

"3) PE under 15, little to no debt, no more than 2x book (preferably 1x book or less), ROE greater than PE, greater than industry average ROE. Crude I know, but it weeds out a lot of junk."

You might be interested in this thread, Where Buffett Parted Company with Graham, where we discussed how Buffett's views on using book as a valuation method diverged from Graham's. Your method seems to be closer to Graham's original methodology.


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Re: Investment decision checklist
Posted by: John Krantz (IP Logged)
Date: April 21, 2008 12:22PM

DaveinHackensack Wrote:
-------------------------------------------------------
> John Krantz,

> You might be interested in this thread, Where
> Buffett Parted Company with Graham, where we
> discussed how Buffett's views on using book as a
> valuation method diverged from Graham's. Your
> method seems to be closer to Graham's original
> methodology.

Thanks, I'll check the thread out...

I agree I have a Graham-ian way of screening stocks, but the ideaology behind what I pick is different in that I don't try to pick out "cigar butts" for one last puff, but uncovered gems in emerging or unrecognized industries. A whole lot of cigar butts do come up in my screens, but usually the reasons they are cigar butts are complex to unravel and I leave them alone.



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Re: Investment decision checklist
Posted by: DaveinHackensack (IP Logged)
Date: April 21, 2008 09:57PM

John Krantz,

I'd be interest to hear your thoughts after you check out the thread.


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Rating: 2.4/5 (24 votes)



Re: Investment decision checklist
Posted by: John Krantz (IP Logged)
Date: April 22, 2008 08:44AM

Dave,

I see what the thread is saying as far as using book value, in that a large amounts of assets can hamper a business by being costly to upkeep, which I agree with. I think what is different from my approach from Graham is that I start by trying to anticipate a macroeconomic sector which I anticipate great growth in the future (i.e., Chinese pharmaceuticals) and then after I single out the sector and compile a list of prospects, apply my screen to it, which includes price/book value; whereas graham would start with the valuation. In a mature company, having large assets would weigh on it, but usually in the smallcaps I have dealt with the ratio's are low because the companies have been overlooked, and I anticipate the growth will outweigh any of the weight of maintaining assets.

In large caps and some smallcaps I definately agree with buffet, that consumer goodwill/brand name etc and low assets to upkeep make a "better business"...Even in some of the smallcaps I am in like Brazilian fast food corp, I ignore the price book ratio guideline. But say in the case of small Chinese pharms I have no real way of assessing intangibles, so I just try to find the best value, of which book value is an important part, because (for example) the more manufacturing capability a pharm has in China, the better they are able to grow marketshare in China's increasingly westernized pharma industry. In such a case, maintaining large assets doesn't drain the company in upkeep but instead enables growth.


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