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My Investment Checklist

June 07, 2013 | About:
A few different readers have asked about checklists and whether I use one. I have started to recently, and have found it helpful. A year or two ago I heard Mohnish Pabrai talking about the Checklist Manifesto, and how he implemented his own checklist into his investment routine. Pabrai made an analogy to pilots, who go through a detailed checklist just prior to a flight. Using a checklist can help you catch something you didn't check or didn't think about. It can also make your investment routine more organized and efficient.

Mohnish didn't publish his, saying that it would be more beneficial for one to develop his or her own. I would agree with this, because each investing style and process is somewhat unique. Moreover, the process of building the list is beneficial because it gets you thinking about what you value when you buy a stock.

Nevertheless, I thought I'd share mine. This is really nothing special. And it's not nearly as detailed as Mohnish's 88-question checklist. It's just meant to basically reaffirm my thesis and help me make sure I've covered the basics. Another difference I have with Pabrai is that my checklist is used after I've spent some time looking at the investment opportunity, but not before doing a lot of detailed research. I think he mentions that he runs his checklist right before making a "buy or not buy" decision.

So without further comments, here is the screenshot of my checklist. I'd love to hear any thoughts or recommendations, or if you have your own checklist, feel free to share/comment:

Checklist-1.jpg

Checklist-2.jpg

Checklist-3.jpg

Checklist-4.jpg

The basic idea behind my checklist is to focus on the three basic categories of risk: Valuation risk, Leverage risk, and Business risk. All risk can be traced to one of these three areas, and using a checklist can help you mitigate these risks.



Last Two Questions Are Key


The final two questions really help me stay focused on prioritizing investment opportunities. I think about the risk and the downside first, but once that is handled, in order to make money you still need upside. Asking the simple question: "Will this stock double?" has had a surprisingly helpful effect. It also allows me to toss aside mediocre opportunities so I can focus more on the best risk-reward scenarios. By the way, this question was also something I learned from Pabrai.

The last question is another very basic one, but again, it's quite helpful: "Would I buy more?" It forces me to think about the fact that I'm buying a business and not just speculating on an increase in stock price. If the answer to this question is: "no" (assuming the thesis hasn't changed), then you may want to pass on the investment.

There is no science to any of this. The idea is to simply implement something to get you thinking about everything that is important to you when you make an investment. I just started using a formal checklist, and I'll probably add to this over time, including more qualitative questions, but for now, this seems to be helpful in organizing my thoughts and prioritizing opportunities.

About the author:

John Huber
I am the Portfolio Manager at Saber Capital Management, LLC. Saber manages an investment partnership as well as separately managed accounts for clients interested in a focused value investing strategy. My investment style has been most influenced by Ben Graham, Walter Schloss, Warren Buffett, and Joel Greenblatt. I am also the author of www.BaseHitInvesting.com, a value investing blog.

Visit John Huber's Website


Rating: 4.4/5 (37 votes)

Comments

tfrates
Tfrates premium member - 1 year ago
And after you check that every points have been satisfied, how many stocks do you think you will buy ?
r4mangf
R4mangf premium member - 1 year ago
Thanks, John, good article.

I recently read the Checklist Manifesto and went through a similar exercise. My checklist can be viewed on this blogpost. Our approaches have some interesting cross-over, particularly the sanity-check "will it double?"

Since using the checklist, I've found I refer back to it often (there's a printed copy stuck up in front of my desk). Although too early yet to see impact on performance, it has already made sure I run a more comprehensive process than when trying to recall my whole process from memory.

As the book says checklists are useful because they "...established a higher standard of baseline performance".

Best wishes,

Raman Minhas

vgm
Vgm - 1 year ago
John, Raman,

Isn't the answer to the question ''will it double?'' the natural outcome of other factors - for example, FCF yield plus expected growth?
John Huber
John Huber premium member - 1 year ago
Thanks for the comments...

Tfrates, I usually hold a basket of stocks in 3 or 4 main categories (Compounders, Cheap and Good, Cheap Assets, and Special Situations)... check out my blog under Investment Philosophy or Investment Process for more details on these ideas.

I often hold many stocks in my portfolio. 30-50 depending on ideas. Sometimes more, sometimes less. Compounders can be more concentrated, cheap stocks more diversified.

Raman... nice post and nice site. Keep in touch...

VGM... the question "will it double" has just one general purpose. It's to very simply ask myself if I think the stock has a chance to appreciate significantly. This is after I've done research, checked the vital signs, and ensured that risk is under control.

It's just a simple way of making sure that the stock has upside. If not, it's better to find something else. You don't want the portfolio too cluttered, and this helps ensure your portfolio has upside.
r4mangf
R4mangf premium member - 1 year ago
VGM - thanks for your qu - similar to John's response, for me it acts as a sanity check after doing rest of the analysis. You're right, it is a natural outcome of other factors. But not all opps that look good initially will lead to the "will it double". It also helps set a buy price, see this post on Medtronic

Btw, perhaps a more accurate phrase would be "could it reasonably double, if we use conservative assumptions" (much more clumsy to put in a blog post).

John - thanks, appreciate your good work here.

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