Your Investing Checklist Is Probably Too Long
Ask fewer (stricter) questions, not more
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Check out our live podcast (links above) from last week! Tons of fun topics include Nike, top performing small-caps, and discussing our circle of competence.
Now, some thoughts on investing checklists.
The majority of people who buy stocks do zero work. At best, they read an article summarizing the basics of a business and its recent earnings.
These people do not truly know what they own. They could be helped by having more information on the stocks in their portfolios.
People reading this newsletter (i.e. people who do fundamental analysis) can have the opposite problem: information overload that leads to a lack of clarity in the investment process.
You see investors brag about how much research they do. Or how comprehensive their investing checklist is. Look at this tweet combining the checklists of great investors as some sort of formula to find great stocks
Going through these dozens of questions for every company is repetitive, a waste of time, and will only lead to confusion. I don’t know a single company that would answer positively for all of these criteria.
Keep your checklist simple. It will allow you to turn over more rocks and have clear thinking on a stock.
For my investment style, I want to answer three questions:
Does this business have a durable competitive advantage, which leads to durable and predictable earnings power?
Is the stock obviously cheap based on my cash flow estimates over the next 5 and 10 years?
Do I trust management?
I try to answer them in order. First, I want to identify if there is a competitive advantage, and how strong. If I can’t do that, I cannot answer the second question (earnings aren’t predictable if the executive team has no control over earnings).
Then, I ask myself how I feel about management.
It is shocking how few companies pass all three checklist questions if (!) you have a high bar.
Hope everyone had a great 4th of July weekend in the United States. We have a research report episode on O’Reilly coming out this week, plus some fun stuff planned for the rest of the summer.
Brett
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Agree with the sentiment. Research is important to build conviction and know what you own, especially during down periods. But deeper research does not mean better returns. There is a certain point where the law of diminishing returns kicks in. What drives returns is company execution, individual investors have no influence over this.
Going deeper doesn’t necessarily mean increased accuracy either. You often see investors invest so much time into a stock that they are unable to then change their mind when the story changes.