Checklist questions

[racemize]

Hi All, I'm slowly adding questions to my final checklist for investments and thought I see if folks on the board were interested in generating a nice checklist or at least sharing questions with each other.

 

For example, this article showed up in my RSS feed:

http://www.wallstreetoasis.com/forums/anatomy-of-the-10-k

 

and it reminded me to add this to the checklist:

Before I get too excited, I always force myself to highlight in the auditor's note the phrase "fairly, in all material respects" twice, and "maintained, in all material respects" once. While most companies will have an unqualified opinion from their auditors, it's just a good exercise to make sure you don't miss any language changes or anything from year to year that might indicate something is a little fishy. I think it's a good habit to get into if you can help it.

 

 

I imagine if we all posted just a few questions, we could generate a good checklist in no time--any interest?

[stahleyp]

I've thought about this too, race. Have you read this?

 

http://www.amazon.com/The-Investment-Checklist-In-Depth-Research/dp/0470891858/

 

I haven't yet.

[racemize]

I've thought about this too, race. Have you read this?

 

http://www.amazon.com/The-Investment-Checklist-In-Depth-Research/dp/0470891858/

 

I haven't yet.

 

I have his checklist saved somewhere (I saw him give a talk before the BRK meeting).  I still need to mine it to decide which ones to put on mine.

[EliG]

This WSJ article is rather basic and doesn't go into much specifics, but it mentions a few actual questions.

 

http://online.wsj.com/news/articles/SB10001424052702304202204579254793231267408

 

Among the questions on Mr. Pabrai's list: How good is management at allocating capital? Is cash flow overstated because of an unsustainable recent boom? Does the company appeal to me because of personal preferences that might be clouding my judgment?

 

 

[EliG]

Found this in my bookmarks:

 

http://invest.obtusely.com/p/investment-checklist.html

 

 

[obtuse_investor]

Found this in my bookmarks:

 

http://invest.obtusely.com/p/investment-checklist.html

 

That is my shoddy checklist. To be honest, it needs an overhaul and is too high level to be useful.

 

It is more of an outline of a checklist rather than a checklist!

 

[Guest valueInv]

Find the most bearish people on the stock you are interested in and follow every word they say.

 

They will generate a good checklist for you. ;D

 

 

[fwallstreet]

This is a great idea! I don't have a personal list, but have wanted to build one for some time. Would definitely be interested in working with racemize and anyone else that wants to put one together here.

 

Racemize, would you mind sharing Michael Kearn's checklist if you still have it? Probably a good starting point.

 

Based on Pabrai's comments in videos, I believe he divides his checklist into these sections (there are more, but these he explicitly mentioned - in no particular order):

1) Leverage

2) Moats and Competitive Advantages

3) Management and Ownership

4) Miscellaneous (unions/organized labor, environmental, etc)

 

Like obtuse's list, more of an outline but I think good structure/organization is important as well, especially since Pabrai's list has a little under 100 questions or so.  I believe I have some specific questions from other gurus, but will have to look through notes.

 

Also, might be another good source to derive questions from: http://www.gurufocus.com/news/19331/charlie-mungers-investing-principles-checklist

[yadayada]

Like to add:

 

Dont invest in something where both the bear and bull side make compelling arguments, and where you find it hard to prove either of them wrong. means you should throw it on the too hard pile. And so should the bears and bulls of this company  if they have common sense.

 

[mscotten]

Here is the checklist that I have been compiling over the years.

 

investment_questions.doc

[EliG]

A 90-question checklist by an anonymous poster on ValueWalk:

 

http://www.valuewalk.com/2014/01/value-investing-checklist/

[Kraven]

I don't see how someone else's checklist could be of any help in one's investing.  There is no right way to invest.  The primary goal is to protect capital and thus put yourself in the best possible position to make money.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

[yadayada]

I don't see how someone else's checklist could be of any help in one's investing.  There is no right way to invest.  The primary goal is to protect capital and thus put yourself in the best possible position to make money.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

well this is a value investing forum? The check list posted above you is usefull for any value investor. Unless you talk about day traders as well. I guess a value check list is useless there.

 

I do think a check list can be dangerous if your too strict with it tho. Sometimes if a company is cheap enough, it can easily fail on alot of levels probably. But still worth buying because the market is too pessimistic about the risks.

[racemize]

My intent is mostly to use it to make sure I look at everything (e.g., after I've completed analysis).  A lot of times, without something making sure you've paid attention to each potentially important detail, you might forget a few things.  Perhaps one of those few things ends up being critical later--you'd want to be sure you at least thought about it once, even if you decided to purchase anyway.

[bz1516]

I'm looking at these checklists to see if there is anything that makes sense to add to my own protocols.  I'm certainly not going to take someone elses list and adopt it wholesale.  My checklist is really a semi formal decision tree.  No need to go through every item for every investment. 

 

I'm also looking at these checklists to see what they reveal about value investing styles as I really would like to double the amount of high conviction ideas I have at any one time.

 

I also scale into stocks over time as I develop more information about them.  I don't want to take the risk of having a stock get away from me while I'm developing confidence in a conviction.  Sometimes it can take a week or more just to get to the CFO.  i limit a position to 3% until I get enough comfort to go to the next level, and only go through the equivalent of the entire "checklist" for 10% positions.

[fwallstreet]

Thanks to everyone that has shared info/questions already. Really great stuff.

 

Personally, I'm finally building a list after experiencing what racemize is talking about, so I find this discussion/exercise very informative and helpful on a selfish note. I know I can personally learn a lot from how others on this board go about their process and the questions that are a part of it because I'm sure there are some things I might not be paying enough attention to, haven't thought about in a different way or am currently ignoring completely out of ignorance. So thanks again!

 

 

[JBird]

I don't see how someone else's checklist could be of any help in one's investing.  There is no right way to invest.  The primary goal is to protect capital and thus put yourself in the best possible position to make money.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Then try looking for evidence to suggest that you're wrong. Munger has a name for this. An iron prescription, I think.

 

In my view, what you're saying is akin to the following: I don't see how someone else's checklist could be of any help in one's flying.  There is no right way to fly a plane.  The primary goal is to protect your safety and thus put yourself in the best possible position to get from Point A to B.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Of course, plenty of pilots would be dead today had they not totally relied on someone else's checklist.

 

I agree there is no "right way" to invest. That the goal is to limit downside and to maximize upside. And I agree decisions come down to the individual. But it does not follow from these premises that using someone else's checklist cannot be helpful. As an investor my returns would be half what they are had I not totally relied on someone else's checklist.

 

 

[Kraven]

I don't see how someone else's checklist could be of any help in one's investing.  There is no right way to invest.  The primary goal is to protect capital and thus put yourself in the best possible position to make money.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Then try looking for evidence to suggest that you're wrong. Munger has a name for this. An iron prescription, I think.

 

In my view, what you're saying is akin to the following: I don't see how someone else's checklist could be of any help in one's flying.  There is no right way to fly a plane.  The primary goal is to protect your safety and thus put yourself in the best possible position to get from Point A to B.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Of course, plenty of pilots would be dead today had they not totally relied on someone else's checklist.

 

I agree there is no "right way" to invest. That the goal is to limit downside and to maximize upside. And I agree decisions come down to the individual. But it does not follow from these premises that using someone else's checklist cannot be helpful. As an investor my returns would be half what they are had I not totally relied on someone else's checklist.

 

Boom, a Munger quote.  I am obviously wrong.  You got me. 

 

In reading what I wrote, I should not have said it's of no help.  That's clearly incorrect.  It could be of some help in ensuring that one is asking the questions they want to be asking.  Personally, I find checklists in investing to be worthless though.  Investing is not analogous to flying a plane or medical care.  Just my opinion.  You don't need to throw out another Munger quote or a Buffett quote to prove me wrong.

[oddballstocks]

I don't see how someone else's checklist could be of any help in one's investing.  There is no right way to invest.  The primary goal is to protect capital and thus put yourself in the best possible position to make money.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Then try looking for evidence to suggest that you're wrong. Munger has a name for this. An iron prescription, I think.

 

In my view, what you're saying is akin to the following: I don't see how someone else's checklist could be of any help in one's flying.  There is no right way to fly a plane.  The primary goal is to protect your safety and thus put yourself in the best possible position to get from Point A to B.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Of course, plenty of pilots would be dead today had they not totally relied on someone else's checklist.

 

I agree there is no "right way" to invest. That the goal is to limit downside and to maximize upside. And I agree decisions come down to the individual. But it does not follow from these premises that using someone else's checklist cannot be helpful. As an investor my returns would be half what they are had I not totally relied on someone else's checklist.

 

Boom, a Munger quote.  I am obviously wrong.  You got me. 

 

In reading what I wrote, I should not have said it's of no help.  That's clearly incorrect.  It could be of some help in ensuring that one is asking the questions they want to be asking.  Personally, I find checklists in investing to be worthless though.  Investing is not analogous to flying a plane or medical care.  Just my opinion.  You don't need to throw out another Munger quote or a Buffett quote to prove me wrong.

 

"if all you have is a hammer everything looks like a nail"

 

I agree with Kraven, investing isn't like flying or surgery.  Every company is different, do you think the same way about investing in a bank as you do an industrial manufacturer?  Do you have checklists for each industry?

 

A checklist is great for a process or procedure that's repeatable every single time.  I have used checklists extensively with things I've done professionally because the process needs to be the exact same.  Checklists work, but with investing items vary each time, they're not the same.

 

I can see the value in a very high level macro list, but the detailed stuff seems crazy.  I've seen checklists with things like "Does the CEO have a good track record of acquisition integration?"  For anyone who's been a part of a merger you know that no two acquisitions are the same.  Most acquisition success is related to the personalities of the people involved, not how strong willed the CEO is.  I've been at companies where one acquisition worked extremely well, and one a year later failed, not due to products or the market, but all personalities involved.

 

Pardon me while I digress... I wonder aloud if there is a lot of thrashing in the investment world because of the personality types who are drawn to investing?  This isn't an attack on anyone in this thread, but this thread has me thinking.  I see a lot of people talking about maintaining massive spreadsheet watch lists, or huge checklists, or reading piles of 10-Ks so they're "prepared" for an investment.  The impression I've had is that most investors are detail oriented structure type personalities.  When I think about those two things it makes perfect sense.  Many investors are the same people who make detailed packing lists before they go on vacation, or plan and structure their vacation down to the hour. 

 

I am not a detail oriented person, I'm far from it, I'm big picture at best.  I'm detail oriented about things I care about.  If I'm researching a company I will suddenly care about the details, but I can't keep a watch list for the life of me.  I like to think about the marginal return from more research.  The marginal return from looking at the financial statements vs not looking at them is huge.  The marginal return from reading the notes vs not reading them is smaller, but still sizable.  The marginal return from reading the notes from an annual report 12 years ago is almost zero.

 

I'd take this level of thinking even further, if I were to look back in time I'd say the return from reading the BAC thread on this board far exceeded reading their entire 10-K.  Yet many investors read the thread, then read every shred of paper out there on BAC.  I don't think the additional information helped them make a better investment, but it made them feel better about it.

 

I think there's a sweet spot in researching, and it's finding enough information to make a great decision, but not drowning yourself in information to feel better about a stock.  If the numbers are ok, and the company is ok it's not necessary to feel good about an investment.  The investment itself isn't the problem, it's the emotional temperament of the investor that's the problem.  I think some people assuage their doubt about an investment by over-researching the investment.  Over-research can be dangerous because it can lead to someone loving a stock instead of being dispassionate about it. 

 

The truth is that no matter how much we research and how much we know none of it makes a difference in the outcome.  If I invest in a great company and spend a year researching, then the CEO has an affair with a staffer and half the execs leave I have no control or way of knowing that, or even changing it.  There is so much unknown and unknowable unless one goes Philip Fisher and starts to interview employees and learn about the culture.  My sense from this board is that no one does that.

 

To pull this full circle I think it's important to know yourself and know your flaws.  If your flaw is that you continually miss the same information when you invest then maybe a checklist is important.  But it's not the end-all be-all. 

 

I'm fully aware that I've probably killed this thread, or will be ignored, but I've said my peace and now I'm content....carry on!

[Kraven]

I don't see how someone else's checklist could be of any help in one's investing.  There is no right way to invest.  The primary goal is to protect capital and thus put yourself in the best possible position to make money.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Then try looking for evidence to suggest that you're wrong. Munger has a name for this. An iron prescription, I think.

 

In my view, what you're saying is akin to the following: I don't see how someone else's checklist could be of any help in one's flying.  There is no right way to fly a plane.  The primary goal is to protect your safety and thus put yourself in the best possible position to get from Point A to B.  How you go about that is an individual, not a group, decision.  As a wise man once said, "now the world don't move to the beat of just one drum, what might be right for you, may not be right for some".

 

Of course, plenty of pilots would be dead today had they not totally relied on someone else's checklist.

 

I agree there is no "right way" to invest. That the goal is to limit downside and to maximize upside. And I agree decisions come down to the individual. But it does not follow from these premises that using someone else's checklist cannot be helpful. As an investor my returns would be half what they are had I not totally relied on someone else's checklist.

 

Boom, a Munger quote.  I am obviously wrong.  You got me. 

 

In reading what I wrote, I should not have said it's of no help.  That's clearly incorrect.  It could be of some help in ensuring that one is asking the questions they want to be asking.  Personally, I find checklists in investing to be worthless though.  Investing is not analogous to flying a plane or medical care.  Just my opinion.  You don't need to throw out another Munger quote or a Buffett quote to prove me wrong.

 

"if all you have is a hammer everything looks like a nail"

 

I agree with Kraven, investing isn't like flying or surgery.  Every company is different, do you think the same way about investing in a bank as you do an industrial manufacturer?  Do you have checklists for each industry?

 

A checklist is great for a process or procedure that's repeatable every single time.  I have used checklists extensively with things I've done professionally because the process needs to be the exact same.  Checklists work, but with investing items vary each time, they're not the same.

 

I can see the value in a very high level macro list, but the detailed stuff seems crazy.  I've seen checklists with things like "Does the CEO have a good track record of acquisition integration?"  For anyone who's been a part of a merger you know that no two acquisitions are the same.  Most acquisition success is related to the personalities of the people involved, not how strong willed the CEO is.  I've been at companies where one acquisition worked extremely well, and one a year later failed, not due to products or the market, but all personalities involved.

 

Pardon me while I digress... I wonder aloud if there is a lot of thrashing in the investment world because of the personality types who are drawn to investing?  This isn't an attack on anyone in this thread, but this thread has me thinking.  I see a lot of people talking about maintaining massive spreadsheet watch lists, or huge checklists, or reading piles of 10-Ks so they're "prepared" for an investment.  The impression I've had is that most investors are detail oriented structure type personalities.  When I think about those two things it makes perfect sense.  Many investors are the same people who make detailed packing lists before they go on vacation, or plan and structure their vacation down to the hour. 

 

I am not a detail oriented person, I'm far from it, I'm big picture at best.  I'm detail oriented about things I care about.  If I'm researching a company I will suddenly care about the details, but I can't keep a watch list for the life of me.  I like to think about the marginal return from more research.  The marginal return from looking at the financial statements vs not looking at them is huge.  The marginal return from reading the notes vs not reading them is smaller, but still sizable.  The marginal return from reading the notes from an annual report 12 years ago is almost zero.

 

I'd take this level of thinking even further, if I were to look back in time I'd say the return from reading the BAC thread on this board far exceeded reading their entire 10-K.  Yet many investors read the thread, then read every shred of paper out there on BAC.  I don't think the additional information helped them make a better investment, but it made them feel better about it.

 

I think there's a sweet spot in researching, and it's finding enough information to make a great decision, but not drowning yourself in information to feel better about a stock.  If the numbers are ok, and the company is ok it's not necessary to feel good about an investment.  The investment itself isn't the problem, it's the emotional temperament of the investor that's the problem.  I think some people assuage their doubt about an investment by over-researching the investment.  Over-research can be dangerous because it can lead to someone loving a stock instead of being dispassionate about it. 

 

The truth is that no matter how much we research and how much we know none of it makes a difference in the outcome.  If I invest in a great company and spend a year researching, then the CEO has an affair with a staffer and half the execs leave I have no control or way of knowing that, or even changing it.  There is so much unknown and unknowable unless one goes Philip Fisher and starts to interview employees and learn about the culture.  My sense from this board is that no one does that.

 

To pull this full circle I think it's important to know yourself and know your flaws.  If your flaw is that you continually miss the same information when you invest then maybe a checklist is important.  But it's not the end-all be-all. 

 

I'm fully aware that I've probably killed this thread, or will be ignored, but I've said my peace and now I'm content....carry on!

 

Absolutely killer post that absolutey no one will pay any attention to.  How can they?  There's no time.  IBM's 1968 annual report is just begging to be read!

[enoch01]

You need to have a little paranoia, I think, to be a good investor over the long term.  Reliance on checklists can create complacency, and where there is complacency, there is risk.  But if you're a little paranoid you will always be thinking about risks that are lurking behind the corner that you've never thought of before - that is, they've never shown up on a checklist.  I've read enough stories of people buying something that was just so, and yet the investment still failed, that I've grown wary of a "checklist mindset".

 

Now if a checklist includes, "does what I'm buying cost less than it's true value", well then I guess everyone here has a checklist of some kind.  But personally I don't keep something by my desk to tick off before I hit "buy".

 

Oh, and +1 to oddballstocks posts on this thread.

[racemize]

You guys crack me up sometimes.  It's pretty typical that Kraven comes in with a make fun of the value investment dogma and then oddball comes in with the upper cut for the finish. 

 

In any event, I agree with most of what your saying, but I think you are perhaps overassuming that these checklists are intended to cover every situation, be extremely long and exhaustive, etc.  I'm just trying to make myself think about a few things I might have missed.  If mine ends up being 100 questions long, I'm pretty sure I failed.

 

Here's a couple that I like:

 

Have you confirmed the auditor's statements in the 10-ks? (I have a habit of forgetting this, and it works for every investment)

 

Is there outstanding debt?  If it is trading below par, are you sure of your thesis?  Is the YTM attractive? (Basically, go look at the debt, if you haven't--it can tell you stuff)

 

 

These are easy questions to answer, and there are enough of them that I might forget one or two.  I just want to make sure I've thought about some important items at the end.  It isn't the be-all-end-all use, just a quick check-up at the end of the process.

[oddballstocks]

You guys crack me up sometimes.  It's pretty typical that Kraven comes in with a make fun of the value investment dogma and then oddball comes in with the upper cut for the finish. 

 

In any event, I agree with most of what your saying, but I think you are perhaps overassuming that these checklists are intended to cover every situation, be extremely long and exhaustive, etc.  I'm just trying to make myself think about a few things I might have missed.  If mine ends up being 100 questions long, I'm pretty sure I failed.

 

Here's a couple that I like:

 

Have you confirmed the auditor's statements in the 10-ks? (I have a habit of forgetting this, and it works for every investment)

 

Is there outstanding debt?  If it is trading below par, are you sure of your thesis?  Is the YTM attractive? (Basically, go look at the debt, if you haven't--it can tell you stuff)

 

 

These are easy questions to answer, and there are enough of them that I might forget one or two.  I just want to make sure I've thought about some important items at the end.  It isn't the be-all-end-all use, just a quick check-up at the end of the process.

 

Thanks?

 

I get your point, you're trying to build a framework for a habit.

 

Here's a question, so you call the auditors of all your investments I presume (based on your above question).  How has this worked for you?  I know I've talked to people who do this and it seems very mixed.  I've heard of auditors gushing about how terrible the client is to others who refuse to answer anything.

 

My take-away from talking to people about this is that the auditor reports are near worthless unless something egregious has happened.  Auditors will talk on the phone about how bad a client is and how they can't be trusted then rubber stamp a fairness opinion.  Is this what you've experienced as well?

 

I had a friend who was a public auditor, I asked her if she would be able to detect fraud at a company, she said it was extremely unlikely.

 

[BG2008]

Bruce Berkowitz has a pretty good checklist. 

 

http://www.marketfolly.com/2012/03/bruce-berkowitzs-basic-checklist-for.html

 

It's not a bad idea for each individual to have their own checklist.  I like to write out the investment thesis.  Buffet had mentioned during an interview that if you can't put it on paper why an investment is compelling, perhaps you have a problem.  In the book, the Big Short, the 2 main characters from Cornwall Capital would create Powerpoint presentations for their thesis.  This probably works better if you take concentrated positions.  If you have a basket approach to value investing, doing so could just be too troublesome. 

[racemize]

You guys crack me up sometimes.  It's pretty typical that Kraven comes in with a make fun of the value investment dogma and then oddball comes in with the upper cut for the finish. 

 

In any event, I agree with most of what your saying, but I think you are perhaps overassuming that these checklists are intended to cover every situation, be extremely long and exhaustive, etc.  I'm just trying to make myself think about a few things I might have missed.  If mine ends up being 100 questions long, I'm pretty sure I failed.

 

Here's a couple that I like:

 

Have you confirmed the auditor's statements in the 10-ks? (I have a habit of forgetting this, and it works for every investment)

 

Is there outstanding debt?  If it is trading below par, are you sure of your thesis?  Is the YTM attractive? (Basically, go look at the debt, if you haven't--it can tell you stuff)

 

 

These are easy questions to answer, and there are enough of them that I might forget one or two.  I just want to make sure I've thought about some important items at the end.  It isn't the be-all-end-all use, just a quick check-up at the end of the process.

 

Thanks?

 

I get your point, you're trying to build a framework for a habit.

 

Here's a question, so you call the auditors of all your investments I presume (based on your above question).  How has this worked for you?  I know I've talked to people who do this and it seems very mixed.  I've heard of auditors gushing about how terrible the client is to others who refuse to answer anything.

 

My take-away from talking to people about this is that the auditor reports are near worthless unless something egregious has happened.  Auditors will talk on the phone about how bad a client is and how they can't be trusted then rubber stamp a fairness opinion.  Is this what you've experienced as well?

 

I had a friend who was a public auditor, I asked her if she would be able to detect fraud at a company, she said it was extremely unlikely.

 

Oh, no, this is a very basic check--just make sure that the auditor's statement is unqualified.  If it is qualified, then that is a really big red flag, particularly given your comments above.