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Equity Investing

Fundamental investing checklist

Invest in systems that ensure consistency to drive improvement.

Intent​

  1. Buy into good businesses
  2. Follow a process, verify Sources
  3. Reinvest your dividends
  4. Watch out for fees
  5. Have a backup plan

Psychology​

Understand human nature

  • Delay gratification
  • Time beats timing
  • Avoid excessive risk

Conviction​

Scoring your conviction:

Financial​

  • Cash flow: Was the company cash flow-positive during the previous quarter and past 12 months?
  • Profitability: Was the company profitable during the previous quarter and past 12 months?
  • Independence: Can the company operate its business in the next three years without relying on external funding?
  • Disclosure: Does the company maintain a high standard of disclosure, consistent with SEC guidelines?
  • Transparency: Would an intermediate investor find the company's financial statements and management ownership disclosures relatively easy to sift through and understand?
  • Well-managed: Did the company report a return on equity of 15% or higher over the previous year?

Market​

  • Growth: Did the company increase its sales by 10% to 40% annually in the previous three years?
  • Underdog: Is the company free of any direct competitors that have substantially greater financial resources?
  • Goliath: Is the company free of any disruptive upstarts visibly challenging its business model?
  • Moat: Would potential new competitors face high economic, technological, or regulatory barriers to entry?

Metrics​

  • Market cap: Does the stock have a market cap of more than $500 million?
  • Beta: Is this stock's beta less than 1.3 for the past 12 months?
  • P/E ratio: Does the stock have a positive price-to-earnings multiple that is less than 30?

Management​

  • Soul: Does this company have soul?
  • Founder: Do founders still have at least a 5% stake in the company?
  • Experience: Do the top three officers have more than 15 years of combined leadership at the company?
  • Binary destiny: Are the company's future business prospects easily able to withstand the binary outcomes that go against it?

ESG​

  • Environmental:
    • Climate risks
    • Natural resources scarcity
    • Pollution and waste
  • Social:
    • Labor issues
    • Product liability
    • Data security risks
    • Stakeholder opposition
  • Governance:
    • Corporate governance
    • Board equality
    • Board effectiveness

Risks​

Ask and answer the most insightful question you can come up with to assess this company's risk.

Conclusion​

  • Trust: Is this company guaranteed to be fault-free and fraud-free in all its corporate statements and deeds?
  • You: Do you want to know more about this company? Are you willing to dig deeper, learn more, and ask questions on the boards in order to actively understand this company?
  • Bulletproof: Are you certain this company is invulnerable to external world or macroeconomic events such that you're sure you can get all your capital back?
  • Timing: What is the chance that your investment outcome will be a substantial loss of potential energy?

Context​

Questions​

Which items on this checklist actually predict returns, and which just make you feel thorough?

  • If a company passes every financial and market check but fails the "Soul" test, is that a buy or a pass — and how do you define soul without fooling yourself?
  • How do you weight ESG factors when they conflict with short-term profitability — is that conviction or cost?
  • When the same checklist produces a "buy" signal for two competing companies in the same sector, what breaks the tie?