Investment Checklist
When it comes to investing, it's essential to have a clear investment checklist that covers all the important factors you need to consider before making a decision. Below are five important areas you should include in your investment checklist:
Company Metrics:
Sector: The sector in which a company operates is an important metric to consider when evaluating its performance. Different sectors have different growth rates, profitability margins, and risks associated with them. For example, technology companies tend to have higher growth rates but also higher risk, while utility companies tend to have lower growth rates but are more stable and have lower risk.
Understandability: The ability to understand a company's business model and operations is critical for investors to evaluate its potential. Companies with complex or opaque business models may be harder to understand and therefore more difficult to evaluate.
Asset Intensiveness: Asset intensiveness is a measure of how much capital a company needs to generate its revenue. Companies that require a lot of capital may be riskier than companies with lower asset intensiveness because they may be more susceptible to changes in interest rates or economic conditions.
Internationalization: The extent to which a company operates in international markets can affect its growth potential and risk profile. Companies with significant international exposure may be subject to currency fluctuations, political instability, and regulatory differences.
Multi-Offerings: Companies that offer a diverse range of products or services may have lower risk because they are less reliant on any single offering. On the other hand, companies that focus on a narrow range of offerings may be more susceptible to changes in market demand.
Target candidate: Understanding a company's target customer is important for evaluating its potential growth and profitability. Companies that target a growing or underserved market may have greater growth potential than companies that target a more mature or saturated market.
Year of Incorporation: The year in which a company was incorporated can provide useful information about its history and experience. Older companies may have a longer track record of performance and a more established reputation, while newer companies may have greater growth potential and be more innovative.
Financial Metrics:
Revenue Size: The size of a company's revenue can provide an indication of its scale and potential profitability. Larger companies may have greater economies of scale and be able to generate higher profits.
Revenue Growth: Revenue growth is a key metric for evaluating a company's potential. Companies with high revenue growth may be better positioned to capture market share and generate higher profits.
Profit/Cashflow Growth: Profit and cashflow growth are important metrics for evaluating a company's financial performance. Companies with strong profit and cashflow growth may be better positioned to weather economic downturns and invest in future growth.
Margins Stability/Expansion: The stability and expansion of a company's profit margins can provide insights into its competitive position and ability to generate profits over the long term.
Predictability: Predictability is a measure of how accurately a company's financial results can be forecasted. Companies with more predictable financial results may be less risky than companies with unpredictable financial results.
Earnings Quality: The quality of a company's earnings is an important metric for evaluating its financial health. Companies with high-quality earnings may be more stable and less likely to experience unexpected losses.
Economic Moat: An economic moat is a competitive advantage that allows a company to maintain its profitability over the long term. Companies with strong economic moats may be more resilient to competition and changes in market conditions.
Healthy Balance Sheet: A healthy balance sheet is important for evaluating a company's financial health. Companies with strong balance sheets may be better positioned to weather economic downturns and invest in future growth.
Smart Capital Allocation: The way a company allocates its capital can provide insights into its management's priorities and ability to generate value for shareholders.
Share Issuance/Dilution: Share issuance and dilution can affect a company's financial health and shareholders' interests. Companies that issue shares frequently or dilute their shares
Management & Investor Profile Metrics:
Alignment of Interest: Alignment of interest refers to the extent to which a company's management team and shareholders have the same goals and incentives. Companies with high alignment of interest may be more likely to make decisions that benefit both management and shareholders.
Notable Co-investors: The presence of notable activist or value co-investors can provide insights into a company's potential. Co-investors with a strong track record of success may indicate that the company has significant growth potential.
Insider Activity: Insider activity refers to the buying and selling of a company's stock by its management team and board members. High levels of insider buying may be a positive sign, indicating that insiders believe the company's stock is undervalued.
Corporate Governance: Corporate governance refers to the structure of a company's management team and its policies and procedures for making decisions. Companies with strong corporate governance may be more transparent and better able to make sound decisions that benefit all stakeholders.
Track Record of Innovation: A company's track record of innovation can provide insights into its ability to adapt to changes in the market and generate new revenue streams.
Stock-Based Compensation: The use of stock-based compensation can affect a company's financial health and shareholders' interests. Companies that use stock-based compensation excessively may dilute their shares and reduce shareholders' ownership.
Risks Metrics:
Customer Concentration: Customer concentration refers to the extent to which a company's revenue is generated from a small number of customers. Companies with high customer concentration may be more vulnerable to changes in demand from their largest customers.
Supplier Concentration: Supplier concentration refers to the extent to which a company relies on a small number of suppliers for its inputs or raw materials. Companies with high supplier concentration may be vulnerable to changes in supplier prices or availability.
Regulatory/Legal: Regulatory and legal risks refer to the potential for a company to be affected by changes in laws or regulations or to face legal challenges. Companies operating in highly regulated industries may be more vulnerable to regulatory risk.
Geopolitical: Geopolitical risks refer to the potential for a company to be affected by changes in political or economic conditions in the regions where it operates. Companies with significant international exposure may be more vulnerable to geopolitical risk.
Industry & Competitiveness Metrics:
Pricing Power: Pricing power refers to a company's ability to raise prices without losing customers. Companies with strong pricing power may be able to generate higher profits and be less vulnerable to competition.
Scale Economies: Scale economies refer to the potential for a company to reduce its costs as it grows larger. Companies with strong scale economies may be able to generate higher profits and be more competitive.
Switching Costs: Switching costs refer to the costs incurred by customers when they switch from one company's product or service to another. Companies with high switching costs may be more likely to retain their customers and generate higher profits.
Barriers to Entry: Barriers to entry refer to the obstacles that new companies face when entering a market. Companies operating in markets with high barriers to entry may face less competition and be able to generate higher profits.
Network Effects: Network effects refer to the phenomenon where a product or service becomes more valuable as more people use it. Companies with strong network effects may be able to generate higher profits and be more competitive.
Market Structure: Market structure refers to the level of competition in a market. Companies operating in highly competitive markets may face lower profit margins and be more vulnerable to changes in market conditions.
Competitive Landscape: The competitive landscape refers to the number and strength of a company's competitors. Companies with strong competitors may face lower profit margins and be more vulnerable to changes in market conditions.
Sector Trends: Sector trends refer to the overall direction and developments within a particular industry. Understanding sector trends can provide insights into the growth potential and competitive dynamics of a particular industry.
Key Data Sources:
Koyfin
TIKR
Morningstar
StockRover
ChatGPT
10-Ks and Transcripts
"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."
Warren Buffett
"We only need a few good investments in a career to be successful. We don’t need to find all the good investments in the universe. In fact, we don’t need to find very many."
Terry Smith
“The coffee can portfolio is a long-term investment strategy that involves buying a diversified portfolio of high-quality stocks and holding them for a very long period, typically 10 years or more, without making any changes or trades.”
Voya Corporate Leaders