An investing checklist

Checklists are useful tools for investment discipline. They have been popularized by the books of Atul Gawande (The Checklist Manifesto) and Michael Shearn (The Investment Checklist).

 Investment checklists come in many shapes and forms. Mohnish Pabrai is right: rather than using someone else's checklist, it is highly recommended to develop your own checklist that works for you.

 I've been using a very simple checklist that covers the following areas:

 

• Business understanding
• Do I understand the business and how it makes money?
• Who are the customers? Are they satisfied / sticky / growing?
• What will the business look like in 10 years?
• Business quality
• How have margins / returns on invested capital / free cash flows develop over time?
• Are the current earnings peak, normal or through?
• Moat durability
• What is the source of competitive advantage? Is it sustainable?
• How intense is the competition? Do we have pricing power?
• Valuation
• EV / EBITDA (compared with history and peers)
• Free cash flow yield (normalized)
• Balance sheet
• Debt to assets, debt to equity
• Adjust for intangible assets, non-financial liabilities
• Management
• How has management allocated capital in the past?
• Do I want to partner with these people? Why?
• Risks
• Business risk
• Leverage risk
• Valuation risk
• Investment thesis
• Why is this a good investment?
• At what price do I buy (more) and sell?

My checklist is a living instrument. It’s clearly not rocket science but it’s invaluable if it can help me avoid past mistakes, and take advantage of market volatility.