Investment Checklist for Stock Selection


Following on from the discussion of my first investing checklist, it’s time to reveal my new investment checklist.

Rather than a checklist of yes/no answers, the new checklist focuses on sets of core to do tasks with the real checklist being only a handful of questions in the “Final Evaluation” section.

I’ve also made it visual so that it makes it quicker and easier to follow. Rather than having a checklist of 100 items thrown at you, having a flow chart will make it easier to manage and keep track of what stage of the investing process you are on.

Investment Checklist Flowchart

Old School Value Investment Checklist Process

Core Investment Checklist

Here is the text version.

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Do the Pre Work

Preliminary Background Reading

  • Read previous thesis on Blogs / Investing Sites / Forums / Alerts
  • Read news headlines

Valuation

Financial Statement Analysis

Dirty Work

  • 2 annual reports
  • 3 quarterly reports
    • specific attention to footnotes at the end of the report
    • managers discussion – consistency, candidness
  • 2 letter to shareholders
    • compare words, numbers to annual report numbers
  • Latest proxy
    • CEO compensation (% of sales)
    • Greed factor (bonuses, reimbursements, planes, boats, family donations)
    • Insider ownership
  • Search CEO history, track record, personality

Emotional Check

  • Write down how you are feeling
  • Beware of
    • wanting to just buy and study later
    • hindsight bias
    • overconfidence
    • obligation to buy due to amount of research
    • reluctance to accept differing opinions
    • social proof bias
  • If required, take a break and clear your mind. Get away from the excitement and  noise.

Final Evaluation (the only checklist you need at this point)

  • What can go wrong?
  • What are the risks? How likely are the risks?
  • How can you lose money?
  • How would you categorise this investment?
  • How attractive is this idea compared to the other holdings? (There can only be ONE best idea. Not 2 or 3.)
  • What is the expected holding time frame?
  • What should be the portfolio sizing?
  • What price will you sell?

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  • Dan

    Jae,

    Great checklist. Any hope of you posting a past (or current) example of this in practice? I’m interested to see how much weight you apply to the various financial metrics. It seems as though everytime I attempt to use more than 6-7 valuation criteria, the available stock selection shrinks close to zero. Do you have luck getting equities to pass all 15 valuation measures?

    How much does the “greed factor” of boards influence your decision in an equity purchase? Has it ever turned you off from a corp?

    Thanks.

  • tim

    great checklist Jae. something i’ve found useful lately is sitting down and actually writing (or at least composing in head) my thesis for the stock. i’ve found that if i can’t write a coherent thesis on a stock, i shouldn’t be in it. just a thought!

    thanks,
    tim

  • Fab

    Hi Jae,

    I’m flabbergasted!!

    Your new checklist is simply great!!

    Thank you very, very much for sharing with us your deep knowledge on fundamental analysis!!

    Just one question:

    Why don’t you give us a practical example?

    Only one would be enough!!

    Anyway, take your time and let us know if you feel like!!

    Again sincere congratulations!!!

    Fab, greetings from Italy!

  • I don’t remember if I already commented on this, but I always ask this: Could I have thought this exact same thing at an earlier time?

    Stocks like EVI (the dry cleaners IIRC) fit a lot of my requirements, but the fact is that I could have thought the same thing 10 years ago and so for me to think the value will be realized in the near future requires more work.

    Anyway, that’s one of my favorite questions to ask 🙂

  • TI

    what I can say any more? your checklist is so simple and thorough and so great, I will start to practise your list today.

  • @ Dan,
    I don’t place much emphasis on financial metrics. It’s easy to try and assign a set rule, but it really never works like that in reality. The point isn’t to see whether it passes all 15 metrics. Just need to see how it stacks up so I know how good or bad the company is.

    I have stayed away from companies that offer outrageous pay to CEO’s where the company is a mess with decreasing revenue and where the CEO himself doesn’t even own much shares.

    @ tim,
    Writing it down is one of the most effective ways of investing in good stocks. Never good enough to just think you know it.

    @ Fab,
    Thanks. An example would have to be left for another time.

    @ Ankit,
    Good point. But the question “could I have thought this exact same thing at an earlier time?” point towards whether you have learnt anything new?

    @ TI,
    Don’t forget to customize it to your own style. Mine should just be a template for others.
    Always good for you to think about ways it will suit you better.

  • Benny

    Hi Jae, greetings from China! I’ve been following your site for some time now. I really find this checklist simple and straight forward. But I couldn’t see the flow chart probably because Scribd.com is blocked in this part of the world. Do you mind sending a copy to my email? I’d appreciate it very much indeed!

  • @ Benny,
    Sent the PDF to your email.

  • T.I.

    Hi! Jae,

    Here is my draft checklist for netnet stocks,

    1. General improvement in the industry
    2. Favorable change in the company’s operating policies, with or w/o a change in management. These changes include more efficient methods, new products, abandonment of unprfitable lines
    3. A sale or merger
    4. Complete or partial liquidation
    4.1 complete liquidation – liquidating dividends
    4.2 partial liquidation – distribute $xx special dividend or/and $xx per share to its shareholders
    5. Have other attractive statistical features, such as
    5.1 satisfactory current earnings and dividends
    5.2 high earning power in the past
    6. Avoid issues which have been losing cash assets and quick assets at a rapid rate and show no definite signs of ceasing.
    7. Exit plan – two years; or 100% return; or a material change in the business that would no longer make its then market price attractive.

    Do you have any comments?

    Thanks.

    Regards
    T.I.

  • Good list of things to look for. But is this checklist for identifying companies or analyzing?

  • T.I.

    Hi! Jae,

    It is the checklist for further analyzing after I identified netnet companies using your screeners and spreadsheets.

    Like you said, screening is the first step, valuation is the second step (so I used your netnet spreadsheet), and the third step is the dirty work process (due diligent) in order to avoid the value trap – espacially for the netnet companies. Therefore, I used the above checklist.

    Could you please comment on my checklist?

    Thanks.

    Regards
    T.I.

  • Well a checklist is very subjective. It’s something that you have to try using, then revising with each investment based on the outcome.

    But so far it looks good and comprehensive.

  • jc

    Dear Jae

    I would like to understand why the effect of Nonoperating/Reoccuring (NO/NR), Tax Rate Change, and Depreciation & Amortization (D&A)is not cummulative when calculating adjusted EPS? I would think if a company is using all of the above to boost earning then to get the true earning, one needs to substract from earning from operation earning of NR/NO, Tax -Rate change,and D&A. Am I wrong to assume such?

    I do not think O’Glove addressed such in his book Quality of Earnings.

  • The book does go over everything that you mention. O’Glove specifically guides the reader on how to adjust EPS to adjust for NO/NR, tax rate changes and D&A.

  • Balaji

    Jae,

    I really like your article. A very good primer for picking stocks. I am unable to download the flowchart, can you please send it to my email address ?

    Thanks,
    Balaji.

  • V

    Jae – Love the EMOTIONAL checklist! Damn useful!

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