The most underrated investing tool: a checklist

The most underrated tool you can use when investing is a checklist.

As Charlie Munger said "I’m a great believer in solving hard problems by using a checklist."

And make no mistake, investing is a hard problem.

One of the biggest reasons for this is the sheer amount of information available. You can analyze financial statements, earnings calls, management interviews, competitors, market trends, valuation multiples, industry reports, customer reviews, Reddit threads, and a lot more.

At some point, the amount of information becomes very overwhelming.

That’s where a checklist helps.

It lets you cut out the noise and focus on the few things that actually matter.

A good analogy is learning how to drive.

When you first start driving, you pay attention to everything:

• Cars ahead of you
• Cars behind you
• Cars beside you
• Weird noises
• Potholes
• Speed
• Road signs
• How your dad reacts when you make certain moves

But once you get better, you focus mostly on the critical things:

• What’s in front of you
• Potential road hazards
• Direction

Everything else becomes more instinctive.

I think investing works in a similar way.

A checklist gives you a baseline to test against. If an investment does not go well, you can look back and ask:

“Did I miss something?”

“Was my checklist incomplete?”

“Was there a factor I underestimated?”

For example, I invested in Amplitude 4 years ago, and the stock has mostly moved sideways. That taught me that valuation alone is not enough. Ideally, you also want positive industry tailwinds.

Now, I don’t think there is a perfect investing checklist.

If there were, everyone would use it, and the edge would disappear.

But I do think there are good and bad checklist items. It also depends heavily on your investment style, the industries you invest in, and what you are trying to achieve.

Here’s the checklist that has been most helpful for me:

1. Does the company have a long-lasting competitive advantage?
2. How good are the products or services?
3. How competent is the management team?
4. Is the valuation reasonable?
5. Is the market for the company’s products or services getting better or worse?
6. What is the competition doing to take market share?
7. Is the company financially healthy? Can it withstand a financial storm?

Each of these can be broken down further.

For example, for management, I look at things like:

• Are they buying back shares?
• Are they reinvesting profits?
• If they are reinvesting, what is their track record on return on invested capital?
• Do they have relevant background and experience in the industry?

Here are some of the resources I personally use:

Management: LinkedIn, Wikipedia, and YouTube interviews to understand who is running the company, how they think, and what their views are.

Competition differences: Technical comparisons, online reviews, and Reddit when it makes sense.

Valuation: I use Wisesheets with a dynamic model where I can change the ticker, adjust the assumptions, and complete my valuation.

Competitive advantage: I try to use the product or service myself whenever possible. I also ask: if I were trying to compete with this company, what would I do? If I were one of its competitors, what would I do?

I look for advantages that are hard to replicate, such as patents, intellectual property, network effects, brand recognition, supplier relationships, manufacturing capacity, and more.

Market direction: I look at market reports and try to understand what is changing in the industry, what segments are growing or declining, and where demand is heading.

Financial health: I use Wisesheets to analyze the company’s financial statements, including profit, free cash flow, margins, growth, solvency ratios, liquidity, returns, and more.

My goal is to figure out whether the company is healthy enough to survive an economic blow.

I’d love to hear from you, what’s on your investing checklist? And what lessons have you learned the hard way?