Preventing mistakes has always been more important to me than getting a stock pick right.
I had limited capital when I started investing, so preventing a permanent capital loss has always been of paramount importance to me.When I sat back and realised that I had the propensity of making the same mistakes repeatedly, I stumbled upon the idea of keeping a checklist to prevent myself from self-destruction.My first brush with something like a checklist came from Phil Fishers classic Common Stocks and Uncommon Profits.
In the book, the appendix covers Fishers thoughts on the key factors to evaluate promising firms which is akin to a checklist.Fisher categorises the key factors as follows:i) Functional Factors like lowest-cost producer, customer orientation and focus on RD amongst others,ii) People factors like growth mindset, entrepreneurial spirit and treatment of staff andiii) Business characteristics like margins, efficiency of operations, competitive positioning and industry leadership.Then I came across Atul Gawandes The Checklist Manifesto.
Here the author talks mainly about using checklists for minimising errors, which reinforced my view of using a checklist.Then I chanced upon a very nice book written by Micheal Shearn, called The Investment Checklist.
This book delves systematically into how to build a checklist and comes up with a fairly good one at the end.It covers business quality, management quality and competence, financial health of the company and growth opportunities.
Any investor wanting to start building his/her own checklist can use this book as a starting point.I have two main types of questions in my own checklist relating mainly to:i) adherence to process steps andii) delving deeper into the company or industry.Questions relating to adherence to a process could be as simple as have I read the last 10 years annual reports or conference call transcripts.Questions that may required delving deeper could be like if I know how many times independent directors have resigned from the board in the past or the quality of independent directors on the board.What I have realised is that beyond what is written in books an investment checklist should try and capture all aspects of investing qualitative, quantitative and, most importantly, behavioural.
It should also capture my own past mistakes to ensure they are not repeated.
The behavioural and past mistakes are not addressed in most investment literature, but they are the most crucial in my view.Just for illustrative purposes, some of the questions relating to behavioural or past mistakes that I have on my checklist are:i) Am I price-anchoring to a previous price at which I had either bought or soldii) Am I being unduly optimistic (optimistic bias) and not looking at disconfirming evidence andiii) Does the company have a large foreign currency borrowing in an overseas subsidiaryThe most important aspect to remember is that a checklist is a living document; one that needs to be updated regularly with newer and better questions and newer mistakes!