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Investing checklists


tombgrt
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Hi all,

 

My interest in investing started in September and since then I am trying to learn on a daily basis. To structure and simplify my investment process and increase the learning experience, I have made a fairly basic checklist which I will use for both selection and (written) analysis of companies.

 

My checklist consists of three parts :

1. Filters. (stolen from Buffett)

2. Metrics valuation. (unfinished and will depend on industry, kind of investment, ...)

3. Additional questions.

 

Only part 1 (not in full detail) and a quick overview of part 2 will be used for the first selection of companies. All three parts will be used in depth when making the write-up of an investment. For the record : This is not a 'list of things I have to do for each investment'. It only provides me with a clear view of what questions I want answered before I consider making an investment.

 

 

Investing Checklist

 

PART 1 : FILTERS

 

Filter #1 – Can I understand the business?

 

Note - Warren Buffet, “To understand a company is to understand its products, its competition, and its earning power.”  “Stay within your circle of competence!”

 

- Industry

- Business segments & products

- Sources of revenue, earnings, cf, …

- Competition

- SWOT

- What kind of company is it : slow grower, stalwart, cyclical, fast grower, turnaround, asset play, … ?

 

Filter #2 – Does the business have a durable competitive advantage?

 

(in write-up : Explain in detail & try to kill it.)

 

Filter #3 – Is the future of the company somewhat predictable?

 

- Predictable because of competitive advantage?

- What does history tell me? (business stability, growth, …)

 

Filter #4 – Does it have management I can trust?

 

- Owner-management (insider ownership);

- Not empire-building;

- Shareholders’ interests in mind (What happens with FCF?);

- Management tested in rough times?

- What is their track record/background?

- Greed factor & compensations (stock option dilution, high bonuses, …);

- Does management deliver or over promise?

 

PART 2 : ASSESSMENT OF METRICS

(unfinished)

 

PART 3 : QUESTIONS

 

Q1 : Is the business available at a very attractive price?

 

- Is there a Margin of Safety?

o Check metrics!

o Patience! Stick with targeted price and keep MOS large enough.

- Look for win/win situations (low level of risk, possible high rate of return)

- What is my estimate of IV?

“It is better to be roughly right than precisely wrong.”

 

Q2 : Why is the company out of favor? What is Mr. Market missing?

 

Dull? Negative news? Too small to follow? In out of favor industry? Hidden assets? Misunderstood? …

 

Q3 : What are the risks?

 

- What can go wrong?

- How can I lose money?

 

Q4 : Possible catalysts?

 

 

 

My questions to the board :

 

- Does my framework make sense?

- Should I add other qualitative filters? Additional main questions needed in my final evaluation?

- Do you have a written down checklist? Do you use a written analysis for each investment or is it all just in your head? If you don't write analyses down extensively, how do you manage to get a proper overview of each investment and how do review possible investment mistakes in the future?

 

 

 

Tom

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Here is my post,  very similar to yours.

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3835.0

 

- Does my framework make sense? - Yes

- Should I add other qualitative filters? Additional main questions needed in my final evaluation? - I prefer qualitative filters.

- Do you have a written down checklist? Do you use a written analysis for each investment or is it all just in your head? If you don't write analyses down extensively, how do you manage to get a proper overview of each investment and how do review possible investment mistakes in the future? - Yes. I keep a running log for each investment with quarterly updates. Mistakes are still made though lol.

 

Finally I believe its not the recipe, but the Chef in investing...

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Two people that I got some very good ideas from is 1) reading a lot about Irving Kahn and using his investing checklist. 2) Peter Cundills' book There's Always Something to do. He has a very long list and using it really helps me filter out a lot of noise and has kept me out of a lot of marginal or lousy stocks.

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Here is my post,  very similar to yours.

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3835.0

 

- Does my framework make sense? - Yes

- Should I add other qualitative filters? Additional main questions needed in my final evaluation? - I prefer qualitative filters.

- Do you have a written down checklist? Do you use a written analysis for each investment or is it all just in your head? If you don't write analyses down extensively, how do you manage to get a proper overview of each investment and how do review possible investment mistakes in the future? - Yes. I keep a running log for each investment with quarterly updates. Mistakes are still made though lol.

 

Finally I believe its not the recipe, but the Chef in investing...

 

Great topic! Thanks for your checklist, I'll be stealing from it. ;) I like the idea of quarterly updates and implementing an expected time frame.

 

I definitely believe the recipe is worthless if the Chef just can't cook, but (especially if you are new) you still need it nonetheless to keep things simple and structured. I don't want to see this as something I just do besides work (I'm still a student tho), I need a well-organised plan and investment philosophy.

 

I'll let you know what things I steal from you! ;)

 

 

Thank you for the link. My search strategy stands alone from this checklist but has a lot in common with yours.

 

           Value Investing: Buy Cheap, Obscure and Out of Fashion

 

Professor Bruce C. Greenwald of Columbia Business School tells you where to look for value in this video:

 

Read his book some months ago. The second best I read (after TII) and will read it again in a couple of months. I will definitely implement EPV as one way to value my investments and a lot of what he says already has a place in my checklist and overall value approach. My copy is marked and has notes written down all over the place. :) Just like TII it is one of those books you need to know inside out to get all the value from it.

 

 

Two people that I got some very good ideas from is 1) reading a lot about Irving Kahn and using his investing checklist. 2) Peter Cundills' book There's Always Something to do. He has a very long list and using it really helps me filter out a lot of noise and has kept me out of a lot of marginal or lousy stocks.

 

I read There's Always Something to do a few weeks ago. I believe it has a lot of hidden value, great book.

 

Can you recommend anything specific on Irving Kahn? Any good books, papers, .. ? :)

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This is a good start but as with all lists you are not going to find very many if any investments that meet all the criteria and you can experiment to find the areas where compromise will hurt you and where it will not.  As you go along, it can be useful to examine where most of your mistakes have been (for me it was highly levered cos) and pay special attention to those areas.  You may also want to look at Tim McElvaine's ABBA framework to get a timeline framework for a value investing idea.  In addition, I have noticed that interesting situations occur in industry groups.  

 

Packer

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This is a good start but as with all lists you are not going to find very many if any investments that meet all the criteria and you can experiment to find the areas where compromise will hurt you and where it will not.  As you go along, it can be useful to examine where most of your mistakes have been (for me it was highly levered cos) and pay special attention to those areas.  You may also want to look at Tim McElvaine's ABBA framework to get a timeline framework for a value investing idea.  In addition, I have noticed that interesting situations occur in industry groups.  

 

Packer

This is a good point about the criteria being a tough filter. Cundill mentioned you couldn't find something that would match the list completely. BUT it would really make you think.
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tombgrt - I think you are on the right track. I have learned alot from other people. I would say the best lessons are the free ones (watching other peoples errors), though the ones that linger the longest are your own (it sucks losing money lol). I think a template is a great idea, when I look back at old investment ideas and thesis's, its quite interesting. Amazing how little I knew back then.

 

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There is some mixing of metaphors going on (checklist vs filter). Pabrai talks about a checklist helping him remember to think through the risk areas that all investments have. An investment checklist seems more qualitative and less binary than a flight checklist or a medical checklist--more judgement seems involved (although maybe I'm wrong). For me, an investment checklist reduces biases: helps me slow down (think fully, rather than act quickly) and helps me invert. It's an exercise in humility.

 

“I liked and admired Ed Colodny, the company's then-CEO, and I still do. But my analysis of USAir's business was both superficial and wrong. I was so beguiled by the company's long history of profitable operations, and by the protection that ownership of a senior security seemingly offered me, that I overlooked the crucial point: USAir's revenues would increasingly feel the effects of an unregulated, fiercely-competitive market whereas its cost structure was a holdover from the days when regulation protected profits. These costs, if left unchecked, portended disaster, however reassuring the airline's past record might be.” ~ Warren Buffett, 1996 Letter to Shareholders

c/o Pabrai, The Checklist

 

 

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3 things missing

 

What do you want the funds for ?, when do you want them ? , & what is your risk tolerance ?. Defines where you need to be (stock vs bond weighting), your time-line (2,4, 6yrs?), & how much loss you're comfortable with (-40% the day after you buy is OK?). Holding the greatest stock in the world is pretty useless to you if you cannot handle its inherent risk & can only hold for 6 months.

 

Filter for the worst sectors over the last year, not security, & go with the best quality in that sector. Both the good & the bad fell with the tide, but all tides eventually rise again - & the good continue to float.

 

1 company per sector - & only 1.

 

SD

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Guys,

 

Have a slightly different approach..more on inverting and looking for companies with issues (commodity like businesses, bad capital allocation) and then compile a list of traits of badly mismanaged companies to avoid... There is an excellent book on this...

 

http://www.amazon.com/Art-Short-Selling-Marketplace-Book/dp/0471146323/ref=sr_1_1?ie=UTF8&s=books&qid=1308544663&sr=8-1

 

 

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