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No. of Recommendations: 11
I'm posting this here and at Deranged (and Lamentably Absent) Monkey Criticism. I started investing 9 years ago. A bit over 6 years ago, I started using an SIP-generated M Formula screen as an absolute initial hurdle, but I've cherry-picked with further reading, not followed the formula by rote at all. I've had call it 10 stocks at a time since, give or take 2-3 at times; churn's been under 30% annually; I've been 15% to 50% cash the last few years. The first 5 years, I was well ahead of the mkt; now, I'm still ahead of the S&P LT, but not a lot, and there have been times the past two years when I've trailed over the trailing year. I understand this will happen with even the soundest approach and assume just staying a bit ahead during times like these is nothing to sneeze at. I'm encouraged by but not-at-all satisfied with my performance.

I recently read Atul Gawande's book The Checklist Manifesto and found it surprisingly compelling. It's about the power checklists have to reduce error in complicated and complex processes. Anyone who has flown in a private (or small) plane knows pilots run through a checklist before flying; it turns out this simple change can have profound results in other situations. When it was applied to the problem of infections in the lines that are inserted into people in hospitals, the infection rate immediately went down 50% (or something similarly breathtaking--I'm not finding and checking the book, but relying on my recent read. But I'm sure I have the scale of the thing right.) I'll leave the book to you all--you get the idea.

One of the later chapters deals w/Mohnish Pabrai and a couple of others' funds and the success they've had adopting checklists. The chapter's short and specifics are few--"review management's statement of risks to business"; "read footnotes to cash flow statements"; "reconcile CF with costs and revenue growth"--but it makes sense this should work with investment: I'm sure (without even being able to drag a specific example to the surface) I've omitted to check THIS because I was so distracted by how excellent THAT looked, and probably here or there a checklist would have made a difference.

So I've decided to make one and I invite everyone's input. I've thought to write this not long after starting a draft of a checklist, so this is the barest of starts, but if this generates any interest, I'll post what I arrive at when I do.

CHECKLIST

STOCK
--How long has the stock traded?
--How has it traded since the IPO; how has it traded over the past 1, 3, 5 years?
--Does it pay a dividend?
--Are there preferred shares; do they pay a div?
--Has share count changed over time? When and how much?
--At what prices has the co. bought and sold its own shares? When has it done so: Can we see/say anything about why?
--Have there been any splits?

EXECUTIVES
--Are they clean? Any regrettable history?
--How long have they been there and in what capacity(-ies)? Any sign they’ve done what they said they would do, or what they set out to do?
--How and how much are they paid? Is their pay tied to their performance? How, and how substantially?

OWNERSHIP
--How much do insiders own?
--How much do current top executives own?
--How have the (two groups) above been trading the stock recently?
--If the execs have been trading, how much have they done so in the past, and how have they done at it? (Not always, but sometimes, interesting.)
--Which institutions and investors own it and what have they been doing?

REVENUES AND COMPETITION
--Is their source simple, or complicated/varied?
--To which countries do they sell? Has this changed a great deal over the long term, or recently?

Again, this is just a start, but I'd be interested in what others would add. Obviously, I imagine adding to the above sections on margins, multiples, earnings, cash flows, balance sheet items, *etc*. I think one of the lists cited in the book was 70+ items long, and that doesn't seem too much to me, just from this first bit of scratching at the problem.

Cheers!
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No. of Recommendations: 3
Hey VitaBevis...

Hewitt Heiserman (who has his own board based on his previous book) is publishing a book called "The Checklist Investor." Details in this post.

http://boards.fool.com/my-next-book-columbia-university-2980...

best.
kevin
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No. of Recommendations: 1
Well Fook-- That rather takes the piss out of my query, doesn't it? Unsurprising, though, and I'm glad to see it's he who is doing it: I thought his first book was full of simple, good sense. I'll be interested to see and will buy a couple copies of this new one, but dang. Now that this is on my plate--now that I've decided to try to do this for my self--I'm just burning with interest. He said it was due in mid-summer, so it's not going to be out for a few months after that, anyway.... Grr.

Funny.
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No. of Recommendations: 40
I've been working on developing a checklist for probably over a year now. Mostly just accumulating others lists as I run across them (I've added yours to my file btw). So, please let us know about the final version, I'd be very much interested.

Imho, the single best checklist (because of its brillance and simplicity) that I've run across was posted many years ago by a former Fool, TMFMillerTime, and I copy and paste it here:


http://boards.fool.com/if-you-wait-for-all-of-those-question...

1- I want to try to eliminate the sell decision by striving to choose investment in wonderful businesses at great valuations that will be able to grow and grow earnings for many many years.

2- Changes in perceptions of a company and industry fundamentals are the catalyst for a stock's movement. Those changes need to be anticipated before others do

3- the most important factor in anticipating change is to understand the competitive position of a company and its industry

4- qualitative factors are prob more important that quantitative

5- decisions must be made with limited and conflicting information. If you wait till you have all the facts... you are buying an efficiently priced equity

6- the more complex my reasoning, the more likely it is to be wrong

7- the best investment are always anti-consensus. If the consensus opinion is correct, outsize results cannot be obtained.

8- I must know the company's key operating indicators to accurately anticipate changes in fundamentals

9- look for fear and loathing in the stock market and be attracted to it.

10- don't be an idiot



The only change I'd make is probably move #10 to the #1 spot. :)

You can't talk about checklists without mentioning Charlie Munger who has long encouraged investors to use a checklist. I've stolen portions of his (this isn't everything), as published in "Poor Charlie's Almanac" and the page numbers refer to that book. There's also some related links at the end of the list.

Charlie’s general problem-solving notions (Page 320 and 279-281):

* Decide the big “no-brainer” questions first.
* Apply numerical fluency.
* Invert (think the problem through in reverse).
* Apply elementary multidisciplinary wisdom, never relying entirely upon others.
* Watch for combinations of factors – the Lollapalooza effects.

Charlie’s Psychology-Based Tendencies (Pages 420-478) list is 25 items long and I won’t regurgitate them here. This is one important area that I know little about and will need to learn about, soon. Psychology can help understand the market’s behavior during unusual times and can also give insights into product marketing.

Munger’s three great lessons of investing (page 69):

1. A great business at a fair price is superior to a fair business at a great price.
2. A great business at a fair price is superior to a fair business at a great price.
3. A great business at a fair price is superior to a fair business at a great price.

Charlie’s DD efforts are guided by his investment checklist (Page 73):

Risk - All investment evaluations should begin by measuring risk, especially reputational

Incorporate an appropriate margin of safety
Avoid dealing with people of questionable character
Insist upon proper compensation for risk assumed
Always beware of inflation and interest rate exposures
Avoid big mistakes; shun permanent capital loss
Be leery of businesses operating in highly regulated industries. What Congress gives they can just as easily take away.


Independence - "Only in fairy tales are emperors told they are naked”

Objectivity and rationality require independence of thought
Remember that just because other people agree or disagree with you doesn’t make you right or wrong - the only thing that matters is the correctness of your analysis and judgment
Mimicking the herd invites regression to the mean (merely average performance)
Preparation - "The only way to win is to work, work, work, work, and hope to have a few insights"

Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
More important than the will to win is the will to prepare
Develop fluency in mental models from the major academic disciplines
If you want to get smart, the question you have to keep asking is "why, why, why?"

Intellectual humility - Acknowledging what you don’t know is the dawning of wisdom

Stay within a well-defined circle of competence
Identify and reconcile disconfirming evidence
Resist the craving for false precision, false certainties, etc.
Above all, never fool yourself, and remember that you are the easiest person to fool
"Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things."

Analytic rigor - Use of the scientific method and effective checklists minimizes errors and omissions

Determine value apart from price; progress apart from activity; wealth apart from size
It is better to remember the obvious than to grasp the esoteric
Be a business analyst, not a market, macroeconomic, or security analyst
Consider totality of risk and effect; look always at potential second order and higher level impacts
Think forwards and backwards - Invert, always invert

Allocation - Proper allocation of capital is an investor’s number one job

Remember that the highest and best use is always measured by the next best use (opportunity cost)
Good ideas are rare - when the odds are greatly in your favor, bet (allocate) heavily
Don’t "fall in love" with an investment - be situation-dependent and opportunity-driven

Patience - Resist the natural human bias to act

"Compound interest is the eighth wonder of the world" (Einstein); never interrupt it unnecessarily
Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
Be alert for the arrival of luck
Enjoy the process along with the proceeds, because the process is where you live

Decisiveness - When proper circumstances present themselves, act with decisiveness and conviction

Be fearful when others are greedy, and greedy when others are fearful
Opportunity doesn’t come often, so seize it when it comes
Opportunity meeting the prepared mind; that’s the game

Change - Live with change and accept unremovable complexity

Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
Continually challenge and willingly amend your "best-loved ideas"
Recognize reality even when you don’t like it - especially when you don’t like it

Focus - Keep things simple and remember what you set out to do

Remember that reputation and integrity are your most valuable assets - and can be lost in a heartbeat
Guard against the effects of hubris (arrogance) and boredom
Don’t overlook the obvious by drowning in minutiae (the small details)
Be careful to exclude unneeded information or slop: "A small leak can sink a great ship"
Face your big troubles; don’t sweep them under the rug.

Things to Avoid:

* Fiercely competitive industries
* Deteriorating Moats
* High leverage (debt levels)

Lollapalooza effects are likely caused by some combination of the following factors (Page 390):

A) Extreme maximization or minimization of one or two variables. Example Costco or our furniture and appliance store.

B) Adding success factors so that a bigger combination drives success, often in nonlinear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often results are not linear. You get a little bit more mass, and you get a lollapalooza result. And, of course, I’ve been searching for lollapalooza results all my life, so I’m very interested in models that explain their occurrence.

C) An extreme of good performance over many factors. Example, Toyota or Les Schwab.

D) Catching and riding some sort of big wave. Example Oracle.

Prior to pulling the trigger checklist (Page 69):

* What are current price, volume and trading considerations?
* What disclosure, timing or other sensitivities exist?
* Do contingent exist strategies exist?
* Are better uses of capital currently or potentially available?
* Is sufficient liquid capital currently on hand or must it be borrowed?
* What is the opportunity cost of that borrowed capital?




Charlie Munger’s:

http://www.gurufocus.com/news/19331/charlie-mungers-investin...

Mental Models:

http://www.focusinvestor.com/FocusSeriesPart3.pdf

Other Parts:

http://www.focusinvestor.com/FocusInvestorSeriesPart1.pdf


http://www.focusinvestor.com/FocusSeriesPart2.pdf

_________________________

Munger Goes Mental:

TMF Article:

http://www.fool.com/investing/general/2004/06/04/munger-goes...

Entire Speech:

http://www.tilsonfunds.com/MungerUCSBspeech.pdf


Moats:

http://boards.fool.com/moat-29353518.aspx?sort=whole


I've got a bit more but I doubt if many will reach it this far.

Rich
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No. of Recommendations: 1
VitaBevis,

I recently read Atul Gawande's book The Checklist Manifesto and found it surprisingly compelling.

It was very good, wasn't it.

I've thought to write this not long after starting a draft of a checklist, so this is the barest of starts, but if this generates any interest, I'll post what I arrive at when I do.

Great. Its tough though isn't it. A checklist has to be short enough to be practical, but encompassing enough to keep one focused / centered. Here is the problem though, most checklists I see focus on buying a stock. Meh. Reminds me of the saying 'the operation was a success, but the patient died'. What needs a checklist first and foremost is the portfolio, second the strategy, third the progress toward a goal, 'whether to buy XXX' isn't so high on my own checklist (which is still sadly amorphous).

Ralph
Helical Investor
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No. of Recommendations: 3
OK, I'll play. Very quickly, and off the top of my head, in no particular order:


Consistency and predictability

Rising earnings — companies in industries that aren't cyclical.

Good returns on tangible capital

No, or modest, long-term debt, depending on the business model and the cost of borrowing.

Shareholder friendly — including dividends and share buy-backs at reasonable prices if appropriate.

Assets not reflected on the balance sheet — for instance, well know and respected brands.

Sustainable competitive advantage — easily said; harder to identify.

A fair price



Don't care about:


Recent or even medium-term stock price performance

The extent of insider ownership

Insider selling or buying

Profit margins — returns on equity and capital tell you all you need to know

Cigar butts
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No. of Recommendations: 3
TMFRichDad, your post is so good that I will copy and add it to the METAR FAQs for easy future reference.

Thanks,
Wendy
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No. of Recommendations: 1
Thanks, Wendy.

Rich
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No. of Recommendations: 3
Rich, that's not what I meant, really, but man was that good reading. Thanks for taking the time to put it all together! I've saved it, too.

Here's my done first draft. It feels like there are Major holes in it, but dang if I'm seeing them yet.

Please feel free, all, to comment or add.

CHECKLIST

STOCK
--How long has the stock traded?
--What is its Mkt Cap?
--How has it traded since the IPO; how has it traded over the past 1 and 3 years?
--Does it pay a dividend?
--How long and consistently has it done so?
--How much has the dividend grown?
--Are there preferred shares; do they pay a div?
--How has share count changed over time?
--At what prices has the co. bought and sold its own shares? When has it done so: Can we see/say anything about why?
--Have there been any splits?
--How much share dilution exists? Has this changed significantly over time?
--If financials have ever been re-stated, do we clearly understand why?

EXECUTIVES
--Are they clean? Any regrettable history?
--How long have they been there and in what capacity(-ies)? Any sign they’ve done what they said they would do, or what they set out to do?
--How and how much are they paid? Is their pay tied to their performance? How, and how substantially?
--Have we reviewed the CEO’s Letter to Shareholders from the past 10 ARs? Have we read the MD&A from the past 8 Q’ly reports?
--Have we reviewed Management’s Disclosure of Risks?

OWNERSHIP
--How big is the float? What % of shares outstanding do insiders hold?
--What % of insiders’ holdings do top executives’ comprise?
--If the execs have been trading, how much have they done so in the past, and how have they done at it? (Not always, but sometimes, interesting.)
--Which institutions and investors own it?
--How have the (four groups) above been trading the stock recently?

REVENUES
--How much have they grown over the past 1, 3, 5, and 10 years?
--What sort of market share do the co’s products enjoy?
--Are there interesting barriers to entry to the co’s mkts?
--Are revenues expected to continue growing? Do we think this plausible?
--Can we identify any upcoming catalysts for revenue growth?
--What is public perception (if any) of this company’s products? Is this changing, or do we see reason it might change?

CUSTOMERS
--Do they have one, a few, many, or a bazillion customers?
--How much do they sell in which countries?
--If they sell to industry, where do their customers rank in their industries?
--Has either of the above changed over the years, or recently?
--Are any customers (or countries) responsible for 5% or more of revenues? How long have they been so?

COMPETITION
--Does the co. enjoy any sort of moat? What defines it?
--Who are the co’s major competitors?
--How do the co’s sales compare to theirs?
--How do the co’s margins compare to theirs and to industry averages?
--Have these changed recently or over the LT?

EARNINGS AND CASH FLOWS
--How have earnings grown over the past 1, 3, 5, and 10 years?
--Have there been any years with losses in the past decade?
--What sort of growth is expected going forward, and what is its source?
--In the past 10 years, how many one-time charges to earnings have there been? What have these charges been? Have they been similar to one another, or varied? Were they well-anticipated and announced well in advance?
--How steady has the relationship between cash flows and earnings been over time? If the answer is “not very,” do we understand why?
--Have we reviewed the footnotes to the CF statement?
--Has capex as a % of CF changed much over time? How about recently?
--What % of revenues is FCF, recently and historically?

DEBT
--What % of equity is LT Debt, including the current portion?
--What’s the current Interest Coverage ratio)?
--What has LT Debt/ Equity been historically?
--How much debt is maturing in the next 5 years? What % of current ttm CF is this?
--Does the co have significant lease or pension obligations?

OTHER BALANCE SHEET ITEMS
--How has BVPS changed over the past 1, 3, 5, and 10 years?
--Has Goodwill changed over the same period?
--What % of ttl assets have Intangibles been historically; what % are they now?
--How much excess cash does the co have?
--Is the current ratio >1.5?

MULTIPLES and MF VALUATION
--What are current/ttm PE, PB, and PCF multiples?
--What has each of the above averaged the past 5 years?
--What are industry averages for these figures?
--Do the above change if we back out excess cash or intangibles?
--In which Magic Formula decile does the stock fall?
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No. of Recommendations: 1
Earnings:

Gross margins-are they increasing year over year?

Return on Assets- increasing year over year?

ROE- greater than industry?
###

Other financial metrics vs industry (I find@M* also on Yahoo)

PE, P/Book, P/Sales vs industry.

Earnings estimate trends, and revised earnings estimates. (What do they know that
I don't).

Finally, I try to find a narrative from a respected resource, and check out conference calls when possible.
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