Investment Checklists

Kumar Thangudu

January 19, 2020

Photo by Ant Rozetsky on Unsplash

I‘m a rookie industrial supply shock investor who focuses on publicly traded companies that require STEM competencies, specifically — chemistry, biology , operations research, and materials engineering— whereby the talent pool of relevant talent to assess such companies, their technologies, and markets are smaller.

For all practical purposes, this is not investment advice, but a pure gambler’s advice. Be prepared to lose all your money by following what I’m about to say.

I know this to be true:

I’ve invested in things like $PCG, Dexcom, and a few tanker stocks.

I’ve invested in things like $PCG, Dexcom, and a few tanker stocks.

I never hold more than 4–5 stocks at a time.

I find it too cognitively challenging to do any more.

I like businesses where my ability to complete due diligence outweighs the competitor.

I never invest alone and remain dogmatic and open minded with my squad of people I co-invest with.

I’ve done some crazy forms of diligence as well.

My next big industrial supply shock bet is on specific medical supply feedstocks. I know it will take me a while to diligence it.

It takes me 6–8 months to observe an industry, understand more about it, talk to people in the space, and watch the trends.

Even after all the diligence in the world, if I don’t believe enough risk has been stomped out, I’ll pass on the investment.

If I do, I pull the trigger really hard.

I wish I could say I have a rigorous investment process, but I don’t.

I’m still learning.

I thought all of you would find these checklists valuable. Given to me by Steve Bell on twitter.

I’ve converted the file to text and all is below.

I’ve converted the file to text and all is below.

I’ll be updating this with links and guidelines to each checklist item periodically and announcing it on twitter. Feel free to follow me.

Joel Greenblatt’s Checklist
1. What are you paying?

2. EBIT/EV What are you getting, i.e. how good a business is it?

3. Normalized EBIT/(NWC + Net Equiprnent)

4. What is normalized EBIT in three years?

Charlie Munger’s Checklist

  • Can you understand the business?
  • Is it in your circle of competence?
  • Avoid industries where you know little, e.g. technology, biotech.
  • Does the business have a moat?
  • Does it have a durable competitive advantage?
  • Avoid perfectly competitive and high fixed cost industries.
  • Does it have managers who behave as owners and are wise capital allocators?
  • Do insiders own their own stock and are they buying back shares?
  • Does the company have a lot of debt? Any long list of numbers multiplied by zero is always zero.

Bruce Basic Checklist For Investing

  • Can you kill the investment?
  • Is there adult supervision at the company?
  • Is the company essential? Does it depend upon the kindness of strangers?
  • What can the company make? Reasonable profitability for owners?
  • How are owners paid? Distributions?
  • Management — honest in past and present?
  • Does accounting reflect reality?
  • Does the balance sheet match up with the income statement?
  • Catalysts — Buybacks? Misunderstood? Is enterprise having a big problem that is fixable?
  • Are there irrational fears of current headwinds, i.e. has everyone been burned by the stock so afraid to buy it?
  • Does the business have pricing power or unit growth?
  • Can you hold the investment for a long time & does it improve portfolio performance?

Warren Buffett’s Checklist

  • Is the business simple and understandable?
  • Does the business have a consistent operating history?
  • Does the business have favourable long-term prospects?
  • Is the management rational with its capital?
  • Is management candid with the shareholders?
  • Does management resist the “institutional imperative”, ie groupthink?
  • Is the focus on Retum On Equity? What is the rate of “owner eamings”?
  • Is there a high profit margin?
  • Has the company created at least one dollar of market value, for every dollar retained?
  • Financial analysis:
  • a. Focus on return on equity, not earnings per share.
  • b. Calculate owner earnings — This is essentially free cash flow.
  • c. Look for companies with high profit margins.
  • Can you see how good they will be versus the competition 10 years from now?
  • What is the value of the business?
  • Can it be purchased at a significant discount to its value? This is the last and most important question.

David Einhorn’s Checklist

  • There were three basic questions to resolve:
  • First, what are the true economics of the business?
  • Second, how do the economics compare to the reported eamings?
  • Third, how are the interests of the decision makers aligned with the investors?

Lou Simpson’s Checklist

  • Does management have a substantial stake in the stock of the company?
  • Is management straightforward in dealings with the owners?
  • Is management willing to divest unprofitable operations?
  • Does management use excess cash to repurchase shares?

Bill Ackman’s Checklist

  • Is the business simple, predictable, free-cash-flow generative, resilient and sustainable?
  • Does the business have strong profit-growth opportunities and/or scarcity value?
  • Does the business have a moat around it?
  • Is it a high-quality businesses that can’t blow up and should grow in value over time?
  • Avoid energy or other cyclical businesses.
  • Avoid healthcare because of all the regulatory uncertainty.
  • For shorts: Is the company violating the law, or has misleading or inaccurate accounting, or has a potential regulatory problem?

Tom Murphy Checklist

Does the company have characteristics of a great businesses?

  • Scarcity value
  • Clear and long runway of growth
  • Limited competition
  • Not capital or labor intensive
  • Minimal govemment involvement
  • A major plus to have a great manager

Michael Porter’s Analysis:

Five forces

  • Threat of new entrants
  • Threat of substitute products or services
  • Bargaining power of customers (buyers)
  • Bargaining power of suppliers
  • Intensity of competitive rivalry

An economic franchise arises from a product or service that contains the following characteristics:

  • It is needed or desired
  • Thought by its customers to have no close substitute
  • Not subject to price regulation

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