Investment Evaluation Checklist

A systematic checklist to evaluate potential investments by assessing key financial, operational, and strategic factors.

Purpose

To systematically evaluate potential investments by assessing key financial, operational, and strategic factors.

Background

This checklist is inspired by a tweet from @datarade which shared an image of a checklist from a summary by @sb9721p. It combines the investing wisdom of Charlie Munger, Warren Buffett, Joel Greenblatt, Bruce Berkowitz, David Einhorn, Lou Simpson, Bill Ackman, Tom Murphy, and Michael Porter. I’ve expanded on this to create an actionable checklist with the help of Claude and Google’s NotebookLM.

Disclaimer

This checklist is for informational purposes only, not financial advice. Investing involves risks, including potential loss of principal. Consult a qualified financial advisor before making investment decisions. The creator is not responsible for any losses or damages from using this information. This checklist may not cover all factors relevant to your situation. By using it, you accept these limitations and risks.

Download: You can download this checklist as a Markdown file to use offline or integrate into your own tools.

1. Initial Screening

• Is the business within your circle of competence?
• Can you explain the business model in one sentence?
• Does the company operate in a stable or growing industry?
• Is the industry free from significant regulatory uncertainty?
• Is the business resilient to economic cycles?

2. Financial Health and Performance

• Calculate and assess: EBIT/EV ratio
• Calculate and assess: Normalized EBIT/(NWC + Net Equipment) ratio
• Review debt levels: Is the balance sheet healthy?
• Analyze free cash flow generation over the past 5 years
• Calculate owner earnings (adjusted free cash flow)

3. Company’s Competitive Position

• Identify the company’s primary competitive advantage (moat)
• Assess the company’s market share within its industry
• Evaluate the company’s pricing power: Strong, Moderate, or Weak?
• Analyze the company’s brand strength or customer loyalty
• Review the company’s operational efficiency compared to peers

4. Industry Competitive Landscape

• Threat of new entrants: High, Medium, or Low?
• Threat of substitute products or services: High, Medium, or Low?
• Bargaining power of customers (buyers): High, Medium, or Low?
• Bargaining power of suppliers: High, Medium, or Low?
• Intensity of competitive rivalry: High, Medium, or Low?

5. Management Quality

• Verify management’s ownership stake
• Review past shareholder communications for honesty
• Assess capital allocation decisions over the past 3-5 years
• Check for any history of unprofitable expansions or acquisitions
• Evaluate the use of excess cash (e.g., dividends, buybacks)

6. Growth Prospects

• Project normalized EBIT for the next 3 years
• Identify specific growth opportunities or new markets
• Assess alignment with long-term industry trends
• Evaluate the scalability of the current business model
• Review the company’s R&D or innovation pipeline

7. Risks and Valuation

• List top 3 risks that could significantly impact the business
• Calculate the margin of safety in the current stock price
• Compare key valuation multiples to industry peers
• Review accounting practices for any red flags
• Assess your comfort level with a 5-10 year holding period

Final Assessment

• Does this investment improve portfolio diversification?
• Rate your confidence in the business (1-10 scale)
• Is the potential return worth the identified risks?
• How does this investment fit with your overall investment strategy?
• Make a final decision: Invest, Watch, or Pass

How to Use This Checklist

1. Work through each section systematically, answering all questions and completing all tasks.
2. Document your findings and analysis for each point.
3. Use your completed checklist as a basis for discussion with your investment team or advisor.
4. Review your analysis holistically before making a final decision.
5. Keep your completed checklist for future reference and to refine your investment process over time.

Remember, this checklist is a tool to guide your thinking and ensure you’ve considered key factors. Your final investment decision should be based on a comprehensive analysis of all available information and your individual financial situation and goals.