The Investment Checklist: The Art of In-Depth Research


All too often, investors buy stocks based on eitherrecommendations from other investors, hunches, or isolated factsabout a business they've heard or read about. In doing this, yourdecision-making process becomes dangerous because you haven't takenthe time to thoroughly understand the businesses you are buying andyou're relying on the information, or misinformation, beingprovided to you about a particular stock. Instead, your investmentpurchases should be based on understanding the value of a businessthrough ...

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The Investment Checklist: The Art of In-Depth Research

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All too often, investors buy stocks based on eitherrecommendations from other investors, hunches, or isolated factsabout a business they've heard or read about. In doing this, yourdecision-making process becomes dangerous because you haven't takenthe time to thoroughly understand the businesses you are buying andyou're relying on the information, or misinformation, beingprovided to you about a particular stock. Instead, your investmentpurchases should be based on understanding the value of a businessthrough in-depth research. If you truly understand the value of abusiness, then you will be in a position to recognize investmentopportunities and can more easily make the right buy or selldecisions.

The Investment Checklist has been designed to help you developan in-depth research process, through a series of checklists, thatwill allow you to effectively generate and research investmentideas, assess the quality of a business and its management team,and ultimately improve the performance of your portfolio. In it,author Michael Shearn—founder of Time Value of Money, LP, andthe Compound Money Fund, LP—outlines the systematic process hehas used over the past decade to carefully think through potentialinvestments and avoid common investment mistakes. Along the way, heputs this approach in perspective by addressing:

  • A search strategy that will improve your odds of findinginvestment ideas worth researching further
  • The importance of evaluating a business's strengths andweaknesses, measuring its operational and financial health, andunderstanding a business from the customers' perspective ratherthan your own
  • Why assessing the quality of management— from how theyhandle daily operations and long-term strategy to the type ofmanagers they are and how they rose to lead the business—areessential to achieving better investment results
  • How to gauge the potential future growth opportunities of abusiness by looking at whether it's growing organically or throughmerger and acquisitions, and whether historical growth has beenprofitable
  • And much more

Each chapter of The Investment Checklist also offers countlessexamples of companies the author has researched, consideredinvesting in, and actually invested in or decided not to invest in.These examples show you exactly how his checklist helped him makeinvestment decisions, and they'll show you how to do the same. Inaddition, each chapter ends with "Key Points to Keep in Mind," soyou can zero in on the critical factors in each set ofquestions.

If you want to lower your investment risk you need to increaseyour knowledge of the businesses you buy stock in. The InvestmentChecklist will show you how to do this, and much more, by helpingyou follow a concise and easy-to-use framework that will guide yourinvestment decisions.

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Product Details

  • ISBN-13: 9780470891858
  • Publisher: Wiley
  • Publication date: 11/8/2011
  • Edition number: 1
  • Pages: 384
  • Sales rank: 642,561
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.30 (d)

Meet the Author

Michael Shearn founded Time Value of Money, LP, a privateinvestment firm, in 1996, to devote his attention to selecting andresearching stocks and private investments. He launched theCompound Money Fund, LP, a concentrated value fund, in 2007. Shearnserves on the Investment Committee of Southwestern University,which oversees the school's $250 million endowment. He is also amember of the Advisory Board for the University of Texas MBAInvestment Fund. Shearn graduated magna cum laude from SouthwesternUniversity, a small liberal arts college in Georgetown, Texas, witha BA in business, with an emphasis in accounting and finance. Helives with his wife and two daughters in Austin, Texas.

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Table of Contents

Preface xi

Acknowledgments xix

Chapter 1 How to Generate Investment Ideas 1

How Investment Opportunities Are Created 1

How to Filter Your Investment Ideas 14

Using a Spreadsheet to Track Potential and Existing Holdings19

Chapter 2 Understanding the Business—The Basics21

1. Do I want to spend a lot of time learning about thisbusiness? 22

2. How would you evaluate this business if you were to becomeits CEO? 23

3. Can you describe how the business operates, in your ownwords? 26

4. How does the business make money? 28

5. How has the business evolved over time? 29

6. In what foreign markets does the business operate, and whatare the risks of operating in these countries? 30

Chapter 3 Understanding the Business—from the CustomerPerspective 39

7. Who is the core customer of the business? 41

8. Is the customer base concentrated or diversified? 42

9. Is it easy or diffi cult to convince customers to buy theproducts or services? 43

10. What is the customer retention rate for the business? 44

11. What are the signs a business is customer oriented? 46

12. What pain does the business alleviate for the customer?49

13. To What degree is the customer dependent on the products orservices from the business? 49

14. If the business disappeared tomorrow, what impact would thishave on the customer base? 50

Chapter 4 Evaluating the Strengths and Weaknesses of aBusiness and Industry 53

15. Does the business have a sustainable competitiveadvantage and what is its source? 54

16. Does the business possess the ability to raise priceswithout losing customers? 68

17. Does the business operate in a good or bad industry? 73

18. How has the industry evolved over time? 77

19. What is the competitive landscape, and how intense is thecompetition? 79

20. What type of relationship does the business have with itssuppliers? 89

Chapter 5 Measuring the Operating and Financial Health of theBusiness 97

21. What are the fundamentals of the business? 98

22. What are the operating metrics of the business that you needto monitor? 100

23. What are the key risks the business faces? 105

24. How does infl ation affect the business? 111

25. Is the business’s balance sheet strong or weak13

26. What is the return on invested capital for the business23

Chapter 6 Evaluating the Distribution of Earnings (CashFlows) 137

27. Are the accounting standards that management usesconservative or liberal? 138

28. Does the business generate revenues that are recurring orfrom one- off transactions? 146

29. To what degree is the business cyclical, countercyclical, orrecession-resistant? 148

30. To what degree does operating leverage impact the earningsof the business? 152

31. How does working capital impact the cash fl ows of thebusiness? 162

32. Does the business have high or low capital-expenditurerequirements? 167

Chapter 7 Assessing the Quality ofManagement—Background and Classification: Who Are They?173

33. What type of manager is leading the company? 176

34. What are the effects on the business of bringing in outsidemanagement? 180

35. Is the manager a lion or a hyena? 183

36. How did the manager rise to lead the business? 186

37. How are senior managers compensated, and how did they gaintheir ownership interest? 192

38. Have the managers been buying or selling the stock? 202

Chapter 8 Assessing the Quality ofManagement—Competence: How Management Operates theBusiness 209

39. Does the CEO manage the business to benefi t allstakeholders? 210

40. Does the management team improve its operations day- to- dayor does it use a strategic plan to conduct its business? 213

41. Do the CEO and CFO issue guidance regarding earnings-219

42. Is the business managed in a centralized or decentralizedway? 222

43. Does management value its employees? 225

44. Does the management team know how to hire well? 239

45. Does the management team focus on cutting unnecessary costs-247

46. Are the CEO and CFO disciplined in making capital allocationdecisions? 248

47. Do the CEO and CFO buy back stock opportunistically? 250

Chapter 9 Assessing the Quality of Management—Positiveand Negative Traits 255

48. Does the CEO love the money or the business? 256

49. Can you identify a moment of integrity for the manager-264

50. Are managers clear and consistent in their communicationsand actions with stakeholders? 268

51. Does management think independently and remain unswayed bywhat others in their industry are doing? 275

52. Is the CEO self-promoting? 276

Chapter 10 Evaluating Growth Opportunities 281

53. Does the business grow through mergers and acquisitions, ordoes it grow organically? 281

54. What is the management team’s motivation to grow thebusiness? 282

55. Has historical growth been profi table and will it continue-283

56. What are the future growth prospects for the business-284

57. Is the management team growing the business too quickly orat a steady pace? 296

Chapter 11 Evaluating Mergers & Acquisitions 305

58. How does management make M&A decisions? 305

59. Have past acquisitions been successful? 310

Appendix A Building a Human Intelligence Network 323

Evaluating Information Sources 324

How to Locate Human Sources 324

How to Contact Human Sources—and Get the Information YouWant 328

Create a Database of Your Interviews for Future Reference329

Appendix B How to Interview the Management Team 331

Ask Open- Ended Questions 332

Be Aware of the Danger of Face- to- Face Assessments of Managers333

Appendix C Your Investment Checklist 335

Notes 339

About the Author 351

Index 353

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