Investment Checklist

by Investing Obtusely


This is the checklist that I use before making any investment purchase decision. I primarily use it as a guide to ground my thought process and to control my emotions from taking charge of the situation.

The idea is to answer the following questions, as honestly as possible.

• Circle of Competence
• Do I understand the business?
• What is the business model?
• Write a single sentence that explains how they make money.
• Management Assessment
• Is the management compensation structure aligned to the stockholders'? 
• Does management overuse options vs. stock ownership?
• Is the management more concerned with fattening their pockets or are they more concerned with sensible stewardship of the business?
• Financial Position Assessment
• Focus on 5-10 year financial statements-- with extra focus on balance sheet, free cash flow and debt (if any).
• Business Risk Assessment
• How favourable is the company's position in the industry?
• How favourable is the company's capital structure? (use of leverage)
• Pricing Assessment
• What is the book value?
• What is the tangible book value?
• What is the Net Current Asset Value?
• Intrinsic Value
• Discounted Cash Flow calculation using very conservative growth estimates and a range of conservative discount rates
• Graham's Intrinsic value calculation using same conservative growth estimates
• Relative valuation based sanity check, specific to the industry. For example, P/B for financial firms, Price-to-FCF for industrials, etc.
• Inversion Exercise
• Write one or two sentences to explain the investment thesis.
• Now, write solid arguments to destroy this thesis.

This checklist can be used to make a buy or a sell decision.

The buy decision must require favourable answers from all subjective questions above, and market price at 50%+ discount to the computed intrinsic estimate. The margin of safetymust make up for all the thesis destroying arguments (your's and others').

The sell decision must require a significant deviance-- either of the business fundamentals or of market price above/at computed intrinsic value.