photo © 2010 Alan Cleaver | more info (via: Wylio)
Here’s a secret that I want to tell you. The secret to making fast and quick investment decisions is having an investment checklist. In the previous article, we have mentioned that the first step to researching a company is looking through the financial reports.
It would be really tedious to go over through the numbers without really knowing what to achieve in your research Every time I look at companies to buy, I would ask myself questions like, “Why is this mispriced?” If I could not answer the question after my research, then the stock is probably not mispriced. In my experience, a mispriced stock should have reasons why it’s mispriced. It could be a delay in a game changing product launch or a missed quarterly earnings estimate.
Well, I’m getting ahead of myself here. The first step is looking at your investment checklist and taking notes while you’re reading the financial reports. An organized research process can really make a big difference. It saves time and effort, especially in world abound of investment opportunities.
My checklists are divided into two parts, a qualitative checklist and quantitative checklist. The easy part is the quantitative checklist. You just go through the checklist and financial reports. Get a view of the numbers and what these figures are saying.
The difficult part is the qualitative checklist. It would take some time before you get the hang of this. The more companies you look, the easier it would get. That’s the beauty of this process. You get to learn new things every day. I am not exaggerating here. There’s a lot to learn every day despite being in the industry for quite some time now.
What’s in my checklist? This is actually a compilation of all the things I have learned. I don’t claim this an original piece of work. I copy a lot. I think you should too. There’s no rule that says you can’t copy investing process or methods.
Here’s our investment checklist:
Business Model
- Explain the whole process of the business – from manufacturing to selling to end-users.
- What is the selling model? Contracts? Services? Products
- Do you have confidence that you’ll have advantage over the other person in the trade?
- How did the company grow? Organically or Acquisitions? Is it sustainable?
- Why is the company good (or bad) in their industry? How do they measure up against competitors?
Industry Checklist
- What will drive the company to perform better than its peers. Write down the key success factors of the industry.
- What’s the opportunity for the industry?
- Do some Porter analysis. (Relative power of customers, suppliers, competitors, regulators and barriers to entry)
- Does the company has a pricing power?
- Can the company differentiate itself from its peers?
Management Checklist
- What is the management’s background? Have they been successful in the past? (Emphasis on the integrity of the CEO and CFO)
- Check if there have been change in CEO’s and CFO’s over the past year. I would put more weight on CFO rather than CEO. A CFO resignation is a red flag on financials.
- Have they been good at allocating capital? Check the return on invested capital.
- Do they think like owners? How much of the company’s stock they own?
- Are they buying or selling their shareholdings?
- Stalk the CEO. (Just kidding!)
I’ll post some of our investment checklists in the next post. If you have noticed, I have started with the qualitative portion. It doesn’t mean that you have to start with this. If you’re comfortable with a quantative checklist first, I suggest that you do it first.