Investment Checklist - An Introduction

This guide is a series of questions to help you make better investment decisions.

Here are seven ways to improve your due diligence process.

1. Business Basics

2. The Customer

3. The Product

4. SWOT Analysis

5. Financials

6. The Team

7. Growth‍

Investment Checklist Introduction

Investment checklists play a fundamental role in disciplined investing. They serve as practical tools that guide investors through the rigorous process of investment analysis and decision-making, helping to reduce mistakes and emotional biases. The complexities and constant evolution of financial markets make investing a challenging endeavor. An investment checklist helps mitigate these challenges by providing a systematic, structured approach for evaluating investment opportunities.

Investors use checklists to ensure they assess every critical aspect of a potential investment. Each item on the checklist is an essential question or consideration that helps determine the viability of the investment. From evaluating a company's financial health to understanding its competitive position in the market, a checklist aids in a thorough analysis, ensuring no critical element is overlooked.

The use of an investment checklist helps to enhance the decision-making process, encourages consistency, and assists in managing investment risk. It ensures a methodical approach to investing, where decisions are grounded in careful research rather than impulsive reactions. As such, the investment checklist acts as a safeguard against irrational decisions and reduces the possibility of costly errors.

Moreover, a well-designed investment checklist evolves with the investor, adapting to changes in market conditions and investment strategies. This ensures its ongoing relevance and effectiveness in guiding investment decisions. Today, investment checklists have become an indispensable tool for novice and experienced investors alike, fostering sound investment practices and promoting financial success.

Business Basics

Let's begin with mastering the basics.

• Do I want to spend a lot of time learning about this business?

• Can you describe how the business operates, in my own words?

• Can I explain how this business makes money?

The Customer

Begin with the end in mind. The customer. Bonus points if you're the customer.

• Who is the core customer of the business?

• Who is the ideal customer?

• What is the customer retention rate for the business?

• What are the signs a business is customer oriented?

The Product

To understand a business, you need to touch and feel its value. And the product is a good place to begin.

• Do you understand the product or service offered by the company?

• Will people still be using this product or service in 20 years?

• Is this a mission critical product or service?

• How does inflation affect the business?

• Do you have a list of all products?

• Is there a unique marketing distribution channel?

SWOT Analysis

Do you remember learning about strengths and weaknesses in business school? Well now it is time to apply those to the real-world.

• Does the company have a competitive advantage? Is it sustainable?

• Can the business raise prices without losing customers?

• What is the competitive landscape, and how intense is the competition?

• What are the main reasons a customer would switch to a competitor?

The Team

Now that we've covered the quantitative piece of investing, let's discuss the qualitative piece.

You see it's easy to screen companies based on profit margins and growth potential. But it's more challenging to figure out what's going on behind the scenes.

• How would you evaluate this business if you were to become its CEO?

• What type of manager is leading the company?

• How did the manager rise to lead the business?

Financials

Now the fun begins. We've covered customer and product but nothing about the finances. Let's dive deep into the financials

• Has the company had consistent earnings growth?

• How does the business make money?

• What are the fundamentals of the business?

• What operating metrics do you need to monitor?

• What are the key risks the business faces?

Growth

Now business is about growth. And if you're not growing you're dying. This is an important element. Do not overlook it.

• Have past acquisitions been successful?

• How does management make M&A decisions?

• Does management outperform its competitors?

Investment Checklist Summary

An investment checklist is a crucial tool that helps investors systematically evaluate potential investments. It acts as a guide to analyzing different aspects of a company and its industry, thereby ensuring that investors take a comprehensive approach to their due diligence.

In the process we just went through, we examined ten important sections that should be included in a robust investment checklist. Starting with "Understanding the Basics," investors ensure that they have a solid grounding in the fundamentals of the company, including its business model, industry position, and competitive landscape. The next section, "Customer Perspective," emphasizes understanding the company's customer base and its relationships with its customers, which can significantly impact its long-term success.

"Strengths and Weaknesses" involves conducting a SWOT analysis to identify the company's internal strengths and weaknesses, as well as the external opportunities and threats it faces. The "Operating and Financial Health" section emphasizes the evaluation of key financial metrics and ratios to assess the company's financial stability and profitability.

In the "Earnings (Cash Flows)" section, the focus is on assessing the company's profitability and the sustainability of its earnings and cash flows. The next two sections, "Management" and "Quality Management," involve evaluating the experience, competency, integrity, and strategic vision of the company's leadership team. The "Management Traits" section further delves into the character attributes that define effective leadership.

"Growth Opportunities" encourages investors to identify and evaluate potential avenues for the company's future growth, whether it's through geographic expansion, new product development, or strategic partnerships. Lastly, the "M&A" section pertains to understanding the company's strategy and track record with respect to mergers and acquisitions, which can be an important driver of growth but also pose significant risks.

Each of these sections provides important insights into different aspects of the company and its potential as an investment. By systematically working through each section of the checklist, investors ensure that they leave no stone unturned in their analysis. This thorough due diligence can help investors make more informed decisions, reduce the likelihood of unpleasant surprises, and ultimately, enhance their potential for investment success.

The importance of an investment checklist cannot be overstated. In an increasingly complex and fast-paced investment environment, a checklist provides a structured and disciplined approach to investment analysis. It helps investors avoid common pitfalls, such as over-reliance on short-term trends, neglect of fundamental analysis, and emotional decision-making. Therefore, whether you're a novice investor or a seasoned pro, an investment checklist can be a valuable tool to enhance your investment process and outcomes.