Investment Checklist - Part 1

Picture courtesy 1shots/freedigitalpohotos.net

Checklists are basically tasks/checks that are jotted down in orderly way to make sure that all the items mentioned have been done or covered.  Checklists are used for managing very complex systems or procedures where things are not left to the memory of the person that is executing the task or following the procedure.  Checklists are very commonly used by pilots while flying aircraft and now checklists are slowly being used by health care industry as well during surgical procedures as well as in ICUs.  Checklists have not only helped in saving many human lives but also has helped in cutting down cost and improving quality.  

Checklists can also be used during business or security analysis to make sure we have not missed out on any of the critical factors that needs to be considered before investment.  There are many sites that would give us lot of quantitative metrics and statistics on the business, but they do not provide any insight.  With this regard, I like Charlie Mungers quote below

”Practically everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.” 

As investors we all makes mistakes but the key is to learn from the mistakes and ensure that is not repeated.  Even better is when you can learn from others mistakes and make sure that you do not repeat them.  Some have too many checklists and some have a few.   You may never find a business that satisfies all the items in the list and that is not the point.  You may want to avoid the one that does not conform to the checklist in many aspects or major aspects.

Before one commits capital, one should try to kill the idea using checklist.  If the investment has merit even after checklist evaluation, you can consider it for investment.  While this does not guarantee zero loss, you are sure to avoid big mistakes or frequent mistakes and the upside takes care of itself.  Also, checklists should be updated periodically to cover some of the mistakes committed so it becomes solid over a period of time.  In my next post, I will list some of the checklist items I use while analyzing a business.