I had heard of the idea of checklists some time ago, and even put together some ideas that I did not make use of. I have a couple of objections against checklists:
1. It’s too easy to end up with a laundry list of numbers, with the result that you cannot see the wood for the trees
2. It is difficult to adapt well to different investing styles. For example, a company may be a great turnaround play, a great momentum play, or a great steady compounding GARP. What you would look for in each case may be completely different. Turnarounds are likely to be of low quality, with high debt. Steady compounders are likely to be of high quality and low debt, and hopefully with net cash. How will a checklist adapt to these scenarios?
Charlie Munger offered some sagely advice:
It is remarkable how much long-term advantage people like [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
With that idea in mind, I have started to put together a “dealbreaker” checklist. Rather than tell you what to buy, it tells you what not to buy. If a company satisfies any of the criteria, then it should be immediately rejected:
- listing less than 5 years (exceptions: government issues, and spin-offs)
- never made a profit
I’m tempted to add: all AIM resource stocks.
What’s on your dealbreaker checklist?