Using checklists for investing

Checklists are a superpower for the thoughtful investor

December 25, 2020

Snir's investing desk is a newsletter focused on intelligent, value investing for the individual investor. The subjects are evergreen and deals with the essence of investing, mental models, and concepts.

Checklists are a powerful tool in every practice that requires repeated steps, let alone research practice. Checklists' power is well documented in many books and articles lead by the bestseller the checklist manifesto book.

There are general reasons to use checklists with every practice, but there are also special reasons to do so with your investing practice. We'll get to that.

There are possible checklists for many investing "checkpoints". The two I feel are essential for me are:

  • Checklist for investing in a company
  • Checklist for selling a company

Having checklists on the way in and out stops me from making emotional mistakes on either end. Either rushing into buying a company I'm excited about or selling a company because the market fear got to me.

Subscribers to my mailing list get my personal checklist. New subscribers will receive it with the welcome email, so subscribe today (:

The why and how

Now let's talk about why you should care and how to do it. This section of the post is divided into 3 parts:

  • Why checklists - all the reason to use checklists for processes in general
  • Why checklists for investing - all the specific reasons to do it when investing
  • How to construct your checklist - general guidance on how to build your checklists

Why checklists

Humans aren't perfect

In his book "The checklist manifesto," Atul Gawande tells the story of utilizing checklists in the hospital he worked for.

Thanks to the checklists, the death rate in the hospital got significantly lower.

Doctors made basic mistakes and forgot important steps on procedures that led to death. The introduction of checklists into the process prevented those mistakes.

No one can say the Doctors aren't intelligent or that they didn't care to do their best in this setting. Their mistakes were honest. We are all just humans.

Suppose a checklist is needed for an environment where everyone is intelligent, understands the importance of the thing, and deeply cares about the outcome, probably more than many other settings. In that case, your investing practice needs that too.

Using checklists relieve stress

Without a recorded methodology, your stock analysis process will be fuzzy. You'll go where you'll "feel like", leading to stress and fear you forgot something important.

Instead of wondering if you forgot something, it's much better to record your process. Maybe even refine it with pitfalls you stumble upon through time.

Why checklist for investing

Strategy consistency is what wins in the market

Looking at the best-performing money managers and funds in history - strategy consistency through years and decades is a common theme.

Buffett, Lynch, Li Lu, Jim O'Shaughnessy, and many others nailed down their strategy early on and stuck with it for a very long time.

Being consistent is easier said than done. Eventually, something will happen that will push most people to break their consistency.

The dot com bubble. 2008 financial crisis. Covid crisis. Fed money machine that followed.

And these are the big things. The average investor will be "tested" with many other events through his investing life. Each will try to push him away and question his consistent strategy.

Using a checklist before taking any action will push you toward keeping your strategy consistent. Checklists are your past self, who thought about a strategy in a calm, thoughtful setting, rising to stop the emotional present you from breaking your strategy.

investing checklist

Investing checklist

How to construct your checklist

Be concise

It's tempting to create a glorified to-do list that includes everything you ever came across. This approach will have you never using the checklist as it is most daunting and looks like it provides not enough value.

Killer items

Include steps that can be easily looked over but skipping them might be terminal.

In investing, debt is such an item. Checking out the financial report's debt situation can take no longer than 5 minutes, but failing to do so before investing in a company can be detrimental.

Be clear

The instructions should be clear enough to avoid confusion and trigger action. "Check balance sheet" is too broad and unclear; what to check? "Check debt" is clearer and more to the point.