Investment Checklist

Many investors have a checklist they check off before investing in a company. I have one too and here are some elements from it:

1. Profitability: the company has to be insanely profitable with little requirement for additional capital.
1. Return on assets > 10%
2. Return on equity > 20%
3. Cash flow ~= Net earnings (i.e. depreciation and cap-ex should be about the same)
4. Non-cyclical earnings and good growth
2. What is competitive advantage, and is it sustainable?
3. Low or no leverage should be needed to grow the business: the really good businesses are the ones that need no reinvested capital to grow. Think about See's Candies.
4. Good management: ideally management should have skin in the game and should be competent and honest.
5. Good price: I admit I sometimes compromise on this. It is almost impossible to find companies that satisfy the above 3 requirements that are also cheap. Good companies are recognized by the market.

The full checklist is rather long, and maybe I'll post it some other time. But I really want to analyze some good companies in the next few posts, so I'll end this here.

A recap of my journey, and where I am headed

I started investing my money in 2010. At that time I had most of it in the S&P500 index fund. I got satisfactory results from that initial investment but I wanted to be an enterprising investor as opposed to a defensive investor.

So I started reading all the books and articles I could find on investing and portfolio construction and management. There are many such books. Initially I wanted to trade, so I read up on technical analysis, focusing on price action. At that time I delved into the public markets with a small amount of real money and traded everything from stocks, commodities and currencies. I also used some leverage. In retrospect, I guess I got really lucky because I did not wipe out and actually made some money. But even after doing that, I was not convinced it was anything more than mere luck.

In 2014 I started reading about Buffett. I read The Intelligent Investor, and all of Buffett's letters from Berkshire Hathaway's annual reports. I also read some of his hedge-fund letters from the 1960s. I also read some other letters from value managers that I found on r/securityanalysis, WhaleWisdom, etc.

In 2015, I started reading about businesses and it was a fascinating world out there. I had no idea companies like Apple were so profitable and Panera Bread had such high returns on equity. Companies were so diverse and making money in so many different ways, it reminded me of nature and how each animal operates in a niche and is really good at it. The capitalistic world is also ruthless like nature. Great companies die all the time and new ones are born every year.

So far I have learnt that there are many ways to skin the cat in the stock market:

1. Own undervalued securities of companies, and hold on to them until they become fairly valued. This is the classic Graham-and-Dodd approach to value investing.
   This has several cons:
   a) you have no idea when the undervalued security will actually reach intrinsic value.
   b) there are more frictional costs like taxes, etc.
2. Own productive companies, that earn superior returns on equity. If companies have durability, you do not have to do any more action.
   

I like approach numbered (2) a lot better than the one numbered (1). The thing to be careful about is to own companies that will endure over time. Valuation is less important than other factors like business quality for this approach.

I intend to post on this blog some of my ideas and my holdings. The purpose is to document my learning process over time and maybe to get some feedback from like-minded investors.