I can, however, talk a little bit about creating the checklist and provide some examples. The process of creating a checklist is very simple and works the same way the Federal Aviation Administration does it. You look for mistakes — yours, mine, Warren Buffett’s, Charlie Munger’s or anyone else’s, and look at the salient features of those mistakes — what was present that could have been seen at the time the investment was made. Add that to the checklist. For example, take leverage: There are times leverage can be very damaging to one’s net worth. It is a simple checklist item, but in my checklist there are five or six items related to leverage. So one question might be, what is the debt to EBITDA ratio? Another question might be, what are the debt covenants, and is there a possibility of default anytime soon? Another question would be, when is the debt coming due? The point of these questions is to force the mind to focus. Imagine coming across an idea that could be a 5x. It is easy to get excited about a 5x, but going through the checklist forces me to cover these items.
Another item on my checklist is the one talked about in Atul Gawande’s The Checklist Manifesto, which relates to whether the CEO is going through a divorce. I once had an investment in a company where this was the case. I realized that much of the CEO’s behavior in the corporation was driven by his divorce proceedings, and while it may have made sense from that perspective it was completely dysfunctional from an investor standpoint. Therefore, if I know that the person controlling the company is going through something like a divorce, it would be something to double-check and focus on. With investing, unlike flying, the results of the checklist do not have to be perfect, but they do have to be identified and then one has to have something to compensate for it, like a low price.
Related previous posts: