The Investment Checklist is a valuable resource that private investors should consider adopting as an essential part of their Investment Process. A checklist is used at the bottom of the filter, after generating investment ideas, but before finalizing the Investment Thesis. Its purpose is to act as a pre-thesis due diligence process to quickly sift through ideas and determine if they are worth investing in.

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Where did the idea of a Checklist come from?

Checklists are not a new invention. Many professionals use checklists to enhance performance, prevent mistakes, and reduce errors that can be avoided. Whether it is a safety measure or a simple list of instructions to follow in an efficient business system, checklists are an excellent way to streamline a repetitive process.

Engineers, doctors, pilots, military officials, skydivers, and other professionals in specialized fields use checklists. For instance, when I went skydiving recently, the pilot conducted a pre-flight checklist to ensure that the plane and all the necessary equipment were fully functional. The skydiving team also carried out a thorough checklist of all the gear, the parachute, the equipment, and the pressure gauges. Another parachuter cross-checked this to ensure that nothing was missed or overlooked.

The aim of using a checklist is to eliminate the possibility of a faulty parachute by checking all the critical areas that could go wrong. It is a ritualistic way to ensure safety and avoid fatalities by simply implementing a 10-minute pre-flight and jump check.

In a repetitive field such as investing, the checklist acts in the same way. A pre-investing guide to protect the investor from the pitfalls of the game.

What is an Investment Checklist?

I spend a lot of time running companies through a checklist to quickly identify any issues that were not immediately apparent. There are many styles of investment checklists. Many of the world’s greatest investors use this powerful way to invest. Some checklists are quite complex, while others are a short list of questions that allow investors to identify whether an idea fits within their investment criteria.

The checklist will evolve over time as you add to it. As your investing experience grows, you will find more questions or areas that require more research. At the same time, you may find certain questions on the checklist are no longer relevant. As you learn from your mistakes you can add areas of importance that mean more to you.

No wise pilot, no matter how great his talent and experience, fails to use his checklist

Charlie Munger

A checklist is a simple way to evaluate an idea systematically, in a replicable, methodical, and unemotional manner. The latter is the key to a checklist. It is an unemotional way to conduct due diligence. Investing with emotion is one of the reasons investors sustain losses and achieve sub-par returns long-term.

The checklist indirectly teaches investors to say NO fast and to say YES slowly.

By removing biases, behavioural flaws, and emotions such as greed and fear, we are better prepared to invest based on facts and evidence. The checklist is a safety measure, a way to remove any biases and invest with caution.

I have personally saved a lot of capital by not being swept up in the euphoria of investing and running all ideas through my checklist.

Why is an Investment Checklist important?

Investment checklists are not about the number of questions, but about how important they are and how well they align with your investment strategy. Although every investor should adopt a checklist, it is not for everyone. It creates a level of research and due diligence that can turn off some investors who just want to buy now and research later. However, having a checklist can significantly slow down the rush that investors get from investing and create a level of research that helps in making informed investment decisions.

The purpose of creating a checklist is to find winning investment ideas that are grounded in the underlying philosophy of “knowing what you own” and conducting deep research on companies.

While a checklist can slow down the decision-making process, it speeds up the chance of finding compounders. By eliminating poor investment ideas and creating a pool of the best investable ideas for research, you can have a stream of potential candidates to constantly sift through.

This helps to minimise even the most basic pitfalls that investors face while investing, such as the fear of missing out, following the herd, or investing based on confirmation bias.

If you are looking at an idea and a company does not pass the checklist, no matter how great the story is or how many friends are investing in it, you can stand confident that your decision is based on process and not erratic behaviours.

Most of the time, ideas that failed my checklist ended up being poor performers. Rarely, if a company didn’t pass the checklist, it turned out to be a viable opportunity.

How to build an investment Checklist?

It is important to note that there is no one checklist that applies to all investment styles. Your checklist should be tailored to what you find attractive in an investment and your specific needs. This is why having an investment strategy and understanding what you want to own is crucial.

Your checklist will be based on the qualities that you are looking for in a business, whether it is quantitative or qualitative, certain financial metrics, or key return ratios. The Investment Checklist lies towards the end of the Investment Process “funnel”.

Your checklist should evolve as you make mistakes. Every mistake should be assessed to determine if it could have been avoided. If it was avoidable, adding a question or another safety measure to the checklist can help you avoid the same mistake in the future. I have been caught out by errors that I wouldn’t have even thought about. So, I note them down and add them to the checklist to look out for that type of issue next time.

It is important to keep your checklist simple to avoid analysis paralysis. There are many styles of checklists, some are extensive with ranking systems and numerical ratings for each question. I believe that a percentage ranking is effective. For example, if you have a 10-question checklist and 8 pass the test, then that is 80% and viable to conduct further research on. If a company gets 3/10, that’s 30%, and not in our investable universe.

We have a passion for keeping things simple.

Charlie Munger

Too many levels with hundreds of questions can create an overwhelming process. The investment thesis is a serious due diligence process already. Doubling up is not necessary. I like simple yes or no answers and not ranking 1-5 for every single question.

What to do with all the companies after the Checklist?

When assessing a company for investment, it must meet the majority of the criteria in the checklist, otherwise, it’s not investable. The system should be rigorous but flexible so that you don’t miss out on good investment opportunities. In some cases, you may need to be patient if there are improving fundamentals that are not yet fully developed.

However, it’s important to remember that a few points here or there, or a fraction of a metric out, won’t make a difference in the long run when looking for long-term compounders and great investment ideas. Don’t avoid good investment ideas just because they don’t meet one metric or question.

To help with the assessment process, I use a 3-tier system: Not Investable, Add to Watchlist, and Proceed to Investment Thesis. Companies that don’t meet the majority of the criteria aren’t investable at all, while those that are close but not quite there can be added to a watchlist. The watchlist is important for monitoring potential candidates and looking for improving performance. I continually ask:

1. What needs to happen for this company to pass the checklist and become investable?
2. What metrics or key questions need to be improved to investigate further?

By using this system, you can ensure that you are investing only in companies that meet most of the criteria while keeping track of those that are close to being investable. Having a watchlist of pre-scanned ideas is about being prepared, always alert to great companies, and building out our inventory, which is how you can stay the course long-term.

The checklist and the watchlist go hand in hand. Having a list of vetted ideas and patiently waiting for certain milestones to play out means we can pounce when the opportunity presents itself.

Explaining the Philosophy behind my Checklist.

My checklist must align with what I am looking for. So, to start I note down what this is and then form a checklist around that.

I rely on a checklist to help me invest more efficiently and it helps me to be more agile. Investing requires patience, which is why I only invest in 1-2 ideas per year. To ensure that I make informed investment decisions, I keep an eye on the fundamentals of my current holdings, monitor my watchlist for promising opportunities, and conduct thorough research on new ideas.

By using a checklist, I am able to document my research on various companies. This helps me to evaluate my progress over time and identify areas for improvement. The checklist also prompts me to reflect on my investment decisions, creating a feedback loop that guides my future choices.

I never invest in anything that hasn’t gone through my checklist. Although it can be tempting to skip this step, it is crucial to my process. The checklist helps me to maintain an objective, automated, and repetitive process that checks for any biases or poor thinking.

My checklist is grounded in research, scuttlebutt, and a focus on facts. It also helps me to exclude companies that don’t align with my investment methodology and narrow down my list of investable ideas. This ensures that I am using my time and energy wisely on the very best opportunities.

In fact, the checklist can eliminate 95% of ideas in just a day or two.

A breakdown of my Checklist.

My Investment checklist focuses primarily on Quality and Growth – with a few questions that are aimed at smaller companies. Let’s run through an example.

Checklist Question	Pass or Fail (50 Questions)
MANAGEMENT	9/11
Longstanding CEO and Management in place?	✅
Signs of a track record and over delivery?	✅
Shareholder alignment with Insider Ownership?	✅
Signs of positive culture and employee relations?	❌
Diligent capital allocation?	✅
Adaptable and Innovative to change?	✅
Signs of strong governance and ESG?	❌
Any negative PR, News or Irregularities?	✅
Management Diluting shareholders?	✅
Healthy shareholder yield?	✅
Clearly outline strategy and goals to get there.	❌
PRODUCT AND SERVICE:	5/7
Is the business model easy to understand?	✅
Does it have Market demand and a future?	✅
Can it be replicated easily?	❌
Extreme customer loyalty? Retention?	✅
Easy and affordable customer acquisition?	✅
Is it recurring revenue or once-off transactions?	✅
Signs of pricing power?	❌
COMPETITIVE ADVANTAGE:	3/5
Any durable cost advantages?	✅
Network Effect or Switching Costs?	❌
Intangible Brand Power?	✅
Market leader against competitors?	✅
Growing and widening MOAT?	❌
GROWTH AND FUTURE PROSPECTS:	5/5
In a growing industry playing to a theme?	✅
Optionality and future innovation and products?	✅
Growing Total Addressable Market (TAM)?	✅
Is there room for an organic growth runway?	✅
Plenty of market share to capture?	✅
FINANCIALS:	8/11
Pass balance sheet health check? No-low Debt.	✅
Positive Free Cash Flow?	✅
Low capital Intensity industry?	✅
Positive owner earnings?	✅
Signs of potential operating leverage?	❌
Revenue converting to cash?	✅
Consistency in Earnings and Growth YOY?	✅
Cash Receipts healthy?	✅
Working Capital Positive?	✅
Any customer concentration?	❌
Unusual write-offs or depreciation?	❌
FINANCIAL RATIOS + METRICS:	10/11
ROIC > 20%	✅
FCF to Revenue > 10%	✅
ROA > 7%	✅
Gross Margins > 50%	✅
Operating Margins > 20%	✅
Revenue Growth YoY > 5%	✅
Earnings Growth YoY > 7%	✅
Net Debt to FCF > 5 (Pay off debt x5)	✅
FCF to Earnings > 80% (Converting to FCF)	✅
Is the company trading below its P/E Average?	✅
Meet the min expected annual return of 10%+.	❌
TOTAL SCORE: = 80%	40/50

So in this example, you can see how this investment checklist filters ideas based on my criteria. This would PASS the test.

An Inversion technique at the end of a successful Checklist.

Once a company passes my checklist, I use an inversion technique to determine why I shouldn’t invest in it. This helps me to look at the idea from a different perspective and identify any potential risks or downsides that I may have overlooked. Ask a simple question.

Why don’t I own this company?

Even if a company ranks high on the checklist, I still consider reasons why I might not invest. I find it interesting how I can discover new insights by rephrasing the question and looking at it from a different perspective. A company may pass the checklist with flying colours, and I still proceed to the investment thesis, however, asking this question pushes me to look deeper.

It’s not about turning away every idea but recognizing potential risks and hazards to be aware of. No company is flawless. If we only invested in 100% viable ideas, then I don’t believe any of us would invest at all. Every investment carries some degree of risk. Identifying potential problems helps us to investigate our thesis further and keep a closer eye on our positions.

In Summary…

Investing is all about making rational decisions based on a sound strategy that aligns with your long-term goals. The Investing Checklist is a helpful tool that can ensure you stay within your parameters and avoid mistakes. It is important to have a plan and stick to it, especially in times of uncertainty. By following a checklist, you can make sure that you are investing in the right opportunities and minimising risks.

Investors need a process for selecting investments, otherwise, it’s difficult to know what is worth investing in. A checklist helps you avoid mistakes and add more measures every time a mistake is made. Mistakes are inevitable when it comes to investing, but a checklist can help you minimise them.

To be a successful long-term investor, you need to have a simplified and thorough process grounded in due-diligence that aligns with your goals. Using a checklist and an Investment Thesis can lead to fewer errors of judgment, fewer losses, and improved performance. Remember, a mistake is always around the corner, remain vigilant with the right process.