Checklists helped reduce errors. A lot of errors.
Most commonly used in surgery rooms, checklists help even the brightest doctors reduce mistakes. So why not do the same in investing? Over the years, I've collected dozens of checklists. Most make me feel good. But none do the work for me.
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
- How effective are the company's research-and-development efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting controls?
- Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
- Does the company have a short-range or long-range outlook in regard to profits?
- In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
- Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?
Now every investor needs a contrarian point of view.
So here are Phil's list of Don'ts:
- Don't buy into promotional companies.
- Don't ignore a good stock just because it trades "over the counter."
- Don't buy a stock just because you like the "tone" of its annual report.
- Don't assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
- Don't quibble over eights and quarters.
- Don't overstress diversification
- Don't be afraid to buy on a war scare.
- Don't forget your Gilbert and Sullivan, i.e., don't be influenced by what doesn't matter.
- Don't fail to consider time as well as price in buying a true growth stock.
- Don't follow the crowd.