Investment Checklist

Investment Checklist



This is a simple How to Invest checklist that one can easily go through before making any investment purchase. It provides a framework for the investment process. This not meant to be an end all and we highly suggest you develop your own process and continue to find new ways to challenge your investments. This can act as a starting point.

Circle of Competence Do I understand the business? What is the business model? Can I explain the business model to a 5th grader I know it so well?

Financial Position Be long term orientated and focus on 5 to 10 year financial statements. Pay special attention to the balance sheet. Book value. Tangible Book Value. Return on Equity.  Free cash flow and debt (if any).  Compare debt to assets and free cash flow. Pay special note to when debt matures and the credit ratings for debt and how a companies’ debt trades. Is the share count rising or falling? If it’s rising why?

Business Risk  How favorable is the company’s position in the industry? What does a business’ competitors say about it? What do it’s clients say about it? How favorable is the business in general? Buffett famously said “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Smart people sometimes take on more then can chew and be aware of that.

Management Is the management compensation structure aligned to the best interests of stockholders? Does it promote behavior for running the business for the long term? The financial industry got into a lot of trouble recently for providing incentive for short term profit with no responsibilities. Keep that in mind. Does management overuse options vs. stock ownership? Is the management more concerned with fattening their pockets or are they more concerned with sensible stewardship of the business?

Stock Price What is the price I’m paying for earnings? What is the multiple of book value or tangible book value? What is the Net Current Asset Value? All you need is to do a simple Intrinsic Value Discounted Cash Flow calculation using very conservative growth estimates and a range of conservative discount rates or Graham’s Intrinsic value calculation using conservative growth estimates. You don’t necessarily need to do a Discounted Cash Flow which Charlie Munger famously said he’s never seen Warren Buffett do despite mentioning it. Keep it simple. Be aware of the different ways to evaluate different businesses and the metrics but never stray too far to justify things. Charlie Munger called EBITDA bullshit earnings for a reason. For example, P/B or Price to Book for financial firms, Price-to-FCF or Price to Free Cash Flow for industrials, etc.

Work backwards Write one or two sentences to explain the investment thesis. Now, invert and take the other side and figure out your worst nightmares and why they may occur.

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