Lesson 14: The Power of Checklists

Value investing 101

Investing is not an exact science. Even with years of experience, you’ll make mistakes. But just as surgeons, pilots, and engineers rely on checklists in complex situations to avoid errors, so should every investor.

A checklist helps you:

• Catch your own thinking errors;

• Make decisions systematically and consistently;

• Neutralize emotion, haste, or peer pressure.
  

As Charlie Munger put it:

"We need checklists because our brains sabotage us, even when we mean well."

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Checklists Save Lives (and Protect Capital)

In medicine, checklists were introduced after it became clear that simple mistakes, like leaving an instrument inside a patient, harmed millions.

In aviation, checklists help pilots stay calm and act systematically in moments of stress.

Investing may seem less life-threatening, but poor decisions based on impulse or laziness can destroy capital.

Investing without a checklist? That opens you up to risks like:
❌ Buying stocks based on tips or “gut feeling”
❌ Not understanding the company or sector
❌ Overconfidence in your own analysis
❌ Letting emotions drive decisions
❌ No clear view of risks or an exit strategy

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My Investment Checklist

Here's a short version of my own checklist to help you build your own:

I. A Business You Understand

• Do I understand the sector/industry?

• Is this sector within my circle of competence?

• Do I understand this specific business?

• How does this company make money?

• How has it evolved over time?

• Is the sector fast-changing or prone to obsolescence?

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II. Strong Long-Term Economic Prospects

• Can the market for this company grow more than 10% annually in volume for the next 10 years?

• Can the company grow revenue and profit by 15%+ and maintain ROE above 20%?

• Does it have a durable competitive advantage? What’s the source?

• How fierce is the competition? Are there high barriers to entry?

• Can the company raise prices without losing customers?

• Are results sustainable or temporary (cyclical, one-offs, accounting tricks)?

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III. Strong Financials

• Has revenue and profit grown steadily over the past 8–10 years?

• Is ROE > 15%? What's driving it?

• Debt/Equity ratio < 0.7 (excluding banks/insurers)?

• Any convertible debt or foreign currency risks?

• Is it a capital-intensive sector?

• Positive and rising free cash flow?

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IV. Capable and Trustworthy Management

• Has management acted transparently and honestly in the past?

• Are they open about bad news?

• Was surplus cash allocated efficiently (>15% ROE)?

• Have they wasted money on expensive or failed acquisitions?

• Any signs of aggressive accounting or hidden transactions?

• Conflicts of interest or a poor track record?

• Does management regularly sell shares after exercising options?

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V. Reasonable Price Tag

• Is the current PE ratio > 20x?

• Does the price assume unrealistic growth?

• Is the company trading at a discount compared to the sector?

• Do I get a 20–30% margin of safety based on my DCF?

• Does the market’s expectation differ greatly from mine?

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VI. Psychological Checklist

• Am I being influenced by others (social proof, influencers)?

• Am I irrationally loyal to a stock due to sunk cost fallacy?

• Am I jealous of others who bought earlier?

• Am I ignoring opposing views?

• Am I overly focused on recent performance?

• Have I looked beyond the annual report?

• Am I overconfident or too optimistic?

• Am I slow to respond to bad news?

• Do I want to hold a position just out of habit?

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Charlie Munger’s Principles Checklist

These are less operational, but essential for developing a solid investing mindset:

• Risk: Avoid permanent capital loss. Use a margin of safety.

• Independence: Think for yourself, be rational, resist herd behavior.

• Preparation: Keep learning, read voraciously, build mental models.

• Intellectual humility: Stay within your circle of competence. Be self-critical.

• Rigor: Think in scenarios, invert problems.

• Capital allocation: Think in terms of opportunity cost.

• Patience: Don’t act unnecessarily. Wait for the right moment.

• Decisiveness: Act quickly and with conviction when the time is right.

• Adaptability: Accept change, challenge your beliefs.

• Focus: Guard simplicity, integrity, and your key priorities.
  

"Preparation. Discipline. Patience. Decisiveness."
These are the four pillars of Munger.

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Condensed Checklist

A compact version to quickly test the core of an investment:

• Is the business easy to understand?

• Is there consistent revenue and profit growth?

• Will it still be around (and more profitable) in 10 years?

• Does it have a durable competitive advantage?

• Is management capable and honest?

• Does it need constant heavy investment?

• Does it generate free cash flow?

This checklist helps you capture 80% of the analysis in 20% of the time.

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Recommended Reading:

• The Investment Checklist – Michael Shearn

• The Checklist Manifesto – Atul Gawande

• Poor Charlie’s Almanack – Charlie Munger