Warren Buffett disciples Mohnish Pabrai and Guy Spier are among the value investors using written checklists to improve their investment decisions, physician and author Atul Gawande writes in his interesting new book "The Checklist Manifesto."
"The Checklist Manifesto," which is currently no. 17 on the Amazon.com bestseller list, shows how professionals in numerous fields can use simple checklists to improve their communication with colleagues and get better results. The written checklists help remind people about all the little things that need to be done to achieve success in complex tasks.
Gawande, a surgeon in Boston, focuses mostly on the medical profession in his book. He shows how simple checklists used before surgery have significantly reduced the risks of patient infection and deaths.
But the book shows that checklists also have a place in a diverse group of complex endeavors -- including constructing a skyscraper, safely operating an airplane, preparing a gourmet meal for hundreds of people and picking sound investments.
Gawande's section on investing features Spier and Pabrai -- investment managers who paid $650,100 to have lunch with Buffett in 2008 -- in addition to one other anonymous money manager. All say that preparing and following simple checklists have improved their results and made them more efficient in evaluating possible investments.
As Jason Zweig shows in "Your Money & Your Brain," the prospect of making money on a stock triggers a reaction in the brain similar to the high that cocaine produces. Checklists can help investors overcome that emotion and methodically go through a list of commonly made mistakes. Investors such as Fairholme's Bruce Berkowitz sometimes call this process an attempt to "kill" an idea before deploying capital.
Among the possible items on these investment checklists: going over 10 years worth of financial statements, reading all footnotes, reviewing stated management risks, evaluating competitors, looking at whether insiders have been selling, determining whether the company's success is based on macroeconomic factors soon to change and more.
Though the investors profiled by Gawande were at first concerned the checklists would take too much time, they found that they actually improved efficiency by replacing an open-ended process with a systemic one. Investment results also improved. Yet despite these results, few money managers have started using written checklists.
Pabrai is quoted as saying that someone like Buffett, whose mental IQ is so high, can get away with just having a "mental checklist." But for less gifted managers, written checklists can avoid mistakes.
Even Buffett and partner Charlie Munger have made mistakes that a checklist might have avoided, Pabrai points out. For example Berkshire Hathaway's 2000 purchase of Cort Furniture was based on the premise that businesses were becoming more apt to lease furniture. But that trend was mostly due to the dot.com bubble, which crashed around the time Berkshire bought Cort and hurt the company's results.
The investors that Gawande profiles said the checklist process typically takes a few days of intense research. That should show investors who buy individual stocks on a whim how much work professionals are doing, and to only swim in those waters if they're doing a similar level of analysis.
Also check out: "The Checklist Manifesto," which is currently no. 17 on the Amazon.com bestseller list, shows how professionals in numerous fields can use simple checklists to improve their communication with colleagues and get better results. The written checklists help remind people about all the little things that need to be done to achieve success in complex tasks.
Gawande, a surgeon in Boston, focuses mostly on the medical profession in his book. He shows how simple checklists used before surgery have significantly reduced the risks of patient infection and deaths.
But the book shows that checklists also have a place in a diverse group of complex endeavors -- including constructing a skyscraper, safely operating an airplane, preparing a gourmet meal for hundreds of people and picking sound investments.
Gawande's section on investing features Spier and Pabrai -- investment managers who paid $650,100 to have lunch with Buffett in 2008 -- in addition to one other anonymous money manager. All say that preparing and following simple checklists have improved their results and made them more efficient in evaluating possible investments.
As Jason Zweig shows in "Your Money & Your Brain," the prospect of making money on a stock triggers a reaction in the brain similar to the high that cocaine produces. Checklists can help investors overcome that emotion and methodically go through a list of commonly made mistakes. Investors such as Fairholme's Bruce Berkowitz sometimes call this process an attempt to "kill" an idea before deploying capital.
Among the possible items on these investment checklists: going over 10 years worth of financial statements, reading all footnotes, reviewing stated management risks, evaluating competitors, looking at whether insiders have been selling, determining whether the company's success is based on macroeconomic factors soon to change and more.
Though the investors profiled by Gawande were at first concerned the checklists would take too much time, they found that they actually improved efficiency by replacing an open-ended process with a systemic one. Investment results also improved. Yet despite these results, few money managers have started using written checklists.
Pabrai is quoted as saying that someone like Buffett, whose mental IQ is so high, can get away with just having a "mental checklist." But for less gifted managers, written checklists can avoid mistakes.
Even Buffett and partner Charlie Munger have made mistakes that a checklist might have avoided, Pabrai points out. For example Berkshire Hathaway's 2000 purchase of Cort Furniture was based on the premise that businesses were becoming more apt to lease furniture. But that trend was mostly due to the dot.com bubble, which crashed around the time Berkshire bought Cort and hurt the company's results.
The investors that Gawande profiles said the checklist process typically takes a few days of intense research. That should show investors who buy individual stocks on a whim how much work professionals are doing, and to only swim in those waters if they're doing a similar level of analysis.
