What Is on My Stock Investing Checklist?

Checklists can be so helpful, and they are a simple little trick that gets used in various professions. For example, pilots have prevented many accidents by using preflight checklists. Surgeons also use them to avoid operating room mistakes. Checklists are life-saving! As such, there are clear benefits of using a stock investing checklist to reduce errors and prioritize research.

So why don’t we use them to pick stocks? Yes, I did say “we” because it’s taken me about seven years to start consistently using a checklist in my investing process. This negligence is even after watching videos on the benefits of investing checklists years ago.

I mean, really – what gives!

Well, I won’t get into all the psychological biases I have that made me do this. So instead, let me share the checklist I developed with you. That way, you can make your own investing process change vs. ignoring good advice decisions.

Below the checklist, I’ll also share some of my thoughts on the items and sources of inspiration (read: people I copied).

Stock Investing Checklist

On Present Earnings Power

The focus here is on making sure you can understand the current earnings ability of the stock you’re looking at. It’s easy for companies to play games with accounting and these questions are help filter out how much money they are making, how it compares to competitors, and where the earnings are coming from.

My word of caution here is that oftentimes value investors spend too much time on these items and not enough time on the other checklist categories. Having a good margin of safety is very important in investing though.

Sources of inspiration: Buffett’s letters and The Acquirer’s Multiple book.

On Growth

Projecting growth is one of the most dangerous things about investing. It can be very easy to justify spending unbounded prices on stocks with high-growth numbers. These checklist items were for me to look at key drivers of growth and what the economics indicate about the future opportunity. Rather than projecting past growth to infinity, we want to understand what accrues to you – the shareholder.

Revenue growth is different from earnings growth, which is different from earnings per share growth. You can finance high revenue growth with negative profits or significant share dilution, and there are times when that can be beneficial to a stockholder. However, more often, it’s to hide poor growth economics.

It’s essential to keep in mind that these checklist items attempt to quantify growth opportunities. Still, it can be very easy to fool yourself by making overly optimistic assumptions. With all of that said, I do think that working through the checklist is much better than not knowing the assumptions you’re making.

Sources of inspiration: 100 Baggers book, Mohnish Pabrai’s video on spawning, and Focused Compounding podcast.

On Moat & Durability

There is always someone trying to eat your lunch in a capitalist system. Whether that’s your customers, suppliers/employees, or industry competitors. Because of this, the main job of a stock investor is to seek protection from these outside forces.

After all, what good is getting a 10% yield on your money in the first year if it evaporates away the very next year? That’s just a good way to lose 90% of your money (assuming no recoverable asset value).

Investigating the moat and durability of the company is actually quite fun, this is where you can use learnings from a wide array of disciplines. These checklist items are when you really get a good qualitative understanding of the investment opportunity. The items on my list are heavily copied from Michael Porter, Peter Thiel, and Charlie Munger.

Sources of inspiration: Competitive Strategy book, Zero to One book, and Poor Charlie’s Almanack book – section on human misjudgment.

On Risk

I would almost consider this section as Risk 2.0, due to moat quality being the main risk companies usually have. In this section, I listed out some of the additional risk areas I look at.

This section is intentionally vague because risk is highly dependent on the situation you are looking at. Nevertheless, having checklist items for risk can save lives (or in this case your $$$)!

Sources of inspiration: my shower thoughts on the stocks I own.

On Management & Capital Allocation

This section is the most difficult (at least for me) to assess and has the potential to also be the most lucrative. Managements with superb capital allocation talents can continually enhance shareholder value in a way that can far surpass the other checklist items and any modeled results.

In the book The Outsiders, the outsider group of capital allocators managed to outperform the S&P 500 by 30X on average over 25 years. The best capital allocators often share similarities.

They are opportunistic with capital rather than planned, use leverage wisely, think about returns on incremental capital, use their stock as currency in acquisitions when it’s mathematically advantageous, buyback their stock when it’s undervalued, and often don’t pay dividends.

They also tend to own large amounts of the company stock and have compensation plans that include per share or returns on capital metrics.

Sources of inspiration: The Outsiders book.

Adding More Items to My Stock Investing Checklist

I have started to make this developed checklist an integral part of my investing process. I will continually be updating this checklist as I continue learning about investing. Being a learning machine is the way to get market outperformance.

My ask for anyone reading this article is to comment on anything you think may be missing from my list. I’d also love it if you gave me book recommendations so that I can continue my copycat ways (although I’m slower to copy than I’d like to be).

Disclaimer: I am an Amazon affiliate and thus may receive compensation if you buy items through my provided links. I take this responsibility seriously and will never review books I didn’t read (and often re-read), enjoy, and find incredibly valuable.