Podcast Transcript

Today we will be talking about the importance of having a sound checklist. I see the checklist as the most important step in my investment process. Having a checklist ensures you have minimised as much risk as possible by answering a list of questions you have developed over time from your research and past experience. I know that without my checklist I would forget to look for half of the important points I have listed.

Often these checklist items will force you to go looking for answers as to why some things don’t add up. A checklist will also make you realise whether or not you actually understand the business. I like to have a written answer as well as a rating out of five for each of my checklist items.

The written response is very important, as it will reveal just how well you understand the question and also the business. This is because we can easily brush over a question, thinking we know the answer and understand the consequences, but until we attempt to put these thoughts into words, we could be fooling ourselves with overconfidence in our ability to properly understand the question.

The rating out of five allows me to calculate how well the business has performed after running it through my checklist. For example I have a list of questions which fall under certain categories like growth, management, financials, income statement, balance sheet etc. After completing the checklist I am able to calculate a score for each of these categories to give me a result of how well the business has performed in relation to each category, as well as an overall rating for the business. This overall rating is shown as a percentage, with 100% being the highest rating. I can then use this rating when deciding what margin of safety I should apply to my calculation of the intrinsic value for the business. A higher score will result in a lower required margin of safety, and vice versa, a lower score will require me to have a higher margin of safety to account for the greater level of risk. I will go into more detail about the margin of safety and how and when to apply it in a later episode.

I have compiled a list of a few checklist items that I use which are available on my website at growthwithvalue.com/value-investing, I also go into more detail about checklists in my eBook, ‘How to Value a Business’. Please also note that I am continually adding to this checklist as I learn more about different businesses and investing in general. You can download this free eBook as well as my other eBook, ‘An Introduction to the Stock Market’ and my ‘Value Investing Spreadsheet’ at https://growthwithvalue.com/tools/. You will find the spreadsheet has the most up to date version of my checklist.