Investment Checklist

Investment Checklist

This is the first draft (v0) of my investment checklist. This document follows a value investing philosophy. Future versions will include:

  • Momentum strategies
  • Growth strategies
  • Automated scripts to look for local minima/maxima and cycles

 
* No current plans to start trading options or make short-term trades

Screener

Start with this screener and order by increasing EV/EBIT values. Inspect all the columns and ask the following questions:

  1. Is this an industry I’m comfortable investing in or familiar with?
  2. Get a sense of the company’s financial state by comparing the cash/revenue/equity per share to its market price.
    1. If cash/share > price/share, it MBAGTB!
    2. Look at the cash & revenue per share graphs and see if they’re stable over time. If they’re stable, but the price is depressed, it MBAGTB! (See mean reversion)
  3. Determine whether the EV/<XXX> ratios look low enough to be attractive but also not abnormally low.
    1. If the values are too low, something might be fishy…
    2. If the graphs are historically stable but currently depressed, it MBAGTB!
  4. Determine whether the P/<XXX> ratios look low enough to be attractive but also not abnormally low.
    1. If the values are too low, something might be fishy…
    2. If the graphs are historically stable but currently depressed, it MBAGTB!  (Mean reversion)
  5. Look at the company’s liabilities. A high value is not a deal-breaker, but worth understanding.
    1. Debt/equity ratio.
      1. If the value is really low, that’s great!
      2. Look for a ratio that’s ideally decreasing over time.
      3. If the ratio is high, try to understand why.
    2. Current ratio
      1. If the value is high, that’s great!
      2. Look for a ratio that’s ideally increasing over time.
      3. If the ratio is low, try to understand why.
  6. Dividends. There have been studies showing that optimizing for dividends underperforms, but having a portion of your portfolio be dedicated to high dividend payers is a good way to diversify.
    1. In 2020, a dividend of 5%-10% is great!
    2. If there is no dividend, that is okay.
    3. If the dividend is extremely high, try to understand if it’s maintainable given the depressed price. If the payout ratio is too high, it might not be a good sign…
    4. Look at the dividend per share graph and look for something that is stable and ideally monotonically growing. (See dividend aristocrats)
  7. Look at a company’s return on equity and assets. A low value is not a deal-breaker, but worth understanding.
    1. A ROE > 20% is great!
    2. A ROA > 10% is great!
    3. Look at the ROE and ROA graphs and look for something that is either stable or growing.
    4. If it’s unusually high, something may be fishy…
    5. If the value is currently depressed but historically stable, try to understand if it’s a permanent or temporary change. If it’s temporary, causing the price to be depressed, it MBAGTB!

News

Go on Google and read a few articles and headlines about the company.

  1. Avoid it if it’s facing weird legal, regulatory or political issues. This is too hard…
  2. Avoid it is it’s facing a weird taxation situation. This is too hard….
  3. Avoid it if there’s a bunch of bad press about its management. This is a bad sign…
  4. Is the stock part of a cyclical industry (energy, commodities, semiconductors, etc…). It might hurt in the short-term, but cycles do tend to repeat, so it MBAGTB!
  5. Are global political/economical events (i.e. a pandemic) going to have long-lasting effects on the company?
  6. Are there any catalysts that may trigger the price to go up in the near future?
  7. Make a list of investors/economists/money-managers you trust, and look if they’ve been trading the stock. If they’re buying, it MBAGTB! If they’re selling, you probably shouldn’t buy at this point in time.
  8. Go on SeekingAlpha and look for an overall general sentiment of what people are saying, but do not let this bias you.

Balance Sheet

Look at Stockrow’s summary of the balance sheet at https://stockrow.com/<ticker>/financials/balance/quarterly. There are no specific guidelines here so just think it through.

  1. Look at the breakdown of the company’s assets:
    1. A company that keeps a lot of cash could be valuable and live through tough times.
    2. A company with no cash on hand may be risky since it could default.
    3. A company that has a lot of assets tied up in inventory might not be able to sell it.
    4. Consider discounting assets that are illiquid (e.g. manufacturing plants).
    5. Look for a company whose assets are growing over time (or it’s paying a really good and stable dividend if not).
  2. Look at the breakdown of their liabilities:
    1. Will the company have to use up its cash reserves to pay out bonds or accounts? If so, this could be risky…
    2. Is the company tied up in a bunch of pension/retirement funds? Not a deal-breaker but could be a problem if the number is too large.
    3. Are most of its liabilities short-term rather than long-term? If so, this may be why the company is cheap. It’s facing hardships in the short-term.
  3. Shareholder Equity
    1. Look for a company whose shareholder equity is stable or growing over time.
    2. If the shareholder equity is stable, will it remain that way? Is this a “dividend play”?
    3. If the shareholder equity is low or declining, will the company turnaround or is it simply doomed to die?
  4. Common Shares
    1. Look for a company whose shares are either flat or decreasing.
    2. If it’s decreasing, did the company do buybacks at high or low prices? If it did, management might be making bad decisions…
    3. If it had a sudden spike up in outstanding common shares, try to understand why they did a secondary sale.

Cash Flow

Look at Stockrow’s summary of the balance sheet at https://stockrow.com/<ticker>/financials/cashflow/quarterly. There are no specific guidelines here so just think it through.

  1. Net income. Look for something that’s stable or growing.
    1. If stable, is the company paying good dividends and is the principal safe?
    2. If it’s declining, try to understand whether the decline is temporary or indefinite…
  2. Operating cash flow. Look for a company with positive stable, and ideally growing, operating cash flow.
    1. If it’s negative, is it temporary?
    2. If it’s stable, is the company’s principal stable and is it paying good dividends?

 

Earnings Call

Listen to the most recent or upcoming earnings call of the company and think about the following:

  1. Get a sense of the management team
  2. Get a sense of the company’s plan
  3. Understand their economic moat and how they compare to their competitors
  4. Get a feel for their long-term strategy

 

Insider Buys/Sells

There are a lot of tools (stockrow.com, openinsider.com, gurufocus.com) that make it easy to track insider trading.

  1. If there is a lot of insider selling, don’t touch the stock!
  2. If there is a lot of insider buying, it could signal that the stock is undervalued per the judgment of people who have more information than you.
    1. Note that sometimes there is insider buying to create false public hope and bump up the stock.

 

Investing Plan

Position sizing, selling and holding periods are a very difficult problem that no investor has an answer to. Simply keep the following in mind

  1. Try to hold stocks for at least 12 months to get the benefits of long-term capital gains.
    1. Personal experience: If something > 2x in a short time period, consider taking some money of the table even before the long-term cap gains kick in.
  2. Is this a compounder or dividend payer I plan to hold in perpetuity?
  3. Is there going to be a nearterm catalyst?
    1. Consider putting a long-term limit sell order in case there’s a huge (> 3x spike) that just happens for some reason.
  4. Pick a % of how much of my portfolio I want to allocate to this stock.
    1. Invest the money all at once?
    2. Invest in 25-50% initially, and the rest in chunks on a weekly or bi-weekly basis.

 
* MBAGTB: May Be A Good Time To Buy
 

2 thoughts on “Investment Checklist”

  1. Sean Keane

    what are some of the good stock brokers in UK to invest in stocks, options, commodities in UK ?

  2. Sean Keane

    what are some of the good stock brokers in UK to invest in stocks, options, commodities in UK ? Is saxobank a good brokarage? Please respond to the email provided. Thx in advance

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