Making wise investment decisions requires careful analysis and evaluation of many factors. To aid in this process, experienced investors often use checklists to ensure they consider all important criteria before committing capital. The referenced articles provide summaries of several noteworthy investment checklists proposed by legendary investors like Warren Buffett, Joel Greenblatt, and Guy Spier. By studying their approaches, retail investors can learn to make more disciplined decisions aligned with their financial goals. This article will summarize key points from these checklists, which cover topics like management quality, valuation, competitive dynamics, and risk management. Proper use of checklists can help curtail emotional biases and lead to improved investment outcomes over time.
Warren Buffett’s investment checklist focuses on simple, stable businesses with good management and attractive valuations
Warren Buffett’s highly refined investment checklist has evolved over decades, but maintains a consistent focus on high-quality companies trading at reasonable valuations. In his 1982 checklist, Buffett screens for large, profitable companies with good returns on equity and minimal debt. He avoids turnaround situations and overly complex tech businesses. Buffett wants competent, shareholder-friendly management teams that can be trusted. He insists on a straightforward exit price, unwilling to waste time negotiating ambiguous deals. By 1992, Buffett’s checklist was pared down to just 4 criteria: understandability, good economics, able & trustworthy management, and an attractive price. For Buffett, the essence of successful investing is using a focused checklist to identify a few exceptional businesses, then holding them long-term.
Joel Greenblatt’s checklist highlights the need for specialized skills in merger arbitrage along with asymmetric risk management
Joel Greenblatt is a proponent of merger arbitrage, a strategy that provides uncorrelated returns by profiting from the spread between a takeover offer price and the target’s trading price. But as Greenblatt notes, when merger deals break, the losses can be dramatically larger than the potential gains. So proper risk management is critical. Greenblatt stresses that merger arbitrage requires specialized expertise in areas like M&A contracts, financing, regulations, valuation models, and human psychology. The arbitrageur must be able to accurately assess the multifaceted risks to each deal. Additionally, the aggregate risks across a portfolio of merger deals must be prudently managed to avoid ruin. Although alluring, merger arbitrage requires robust checklists and asymmetric risk control to skillfully harvest its uncorrelated returns.
Guy Spier’s checklist focuses on avoiding companies with management issues, unhealthy ecosystems, and overvaluation
In contrast to Buffett’s quantitative focus, Guy Spier’s checklist highlights harder-to-quantify risks that can ruin investments. He first screens for management teams with integrity who avoid foolish, self-serving actions. Next, Spier analyzes the health of the overall business ecosystem in which the company participates. If external factors beyond management’s control deteriorate, profits suffer. He also verifies the stock is truly undervalued based on current intrinsic value, not optimistic growth assumptions. Spier tries to avoid rationalizing purchases that mainly satisfy emotional desires like boosting self-esteem. In summary, Spier’s checklist provides an excellent framework for assessing hazardous management teams, precarious business environments, excessive prices and self-deception – four factors that can undermine investment success.
The checklists summarized above represent accumulated investment wisdom from industry masters. Retail investors should adapt and customize these checklists for their own needs. Proper checklists improve discipline, reduce biases, and lead to better portfolio decisions. But they are means rather than ends. Checklists complement but can’t substitute for rigorous independent thinking.