Among the many investment books I read, only a few have inspired me enough for me to write about them in detail.
One of these books is “The Investment Checklist” by author Michael Shearn.
He serves on the investment committee of Southwestern University, which oversees the school’s endowment fund, and also is a member of the Advisory Board for the University of Texas MBA Investment Fund.
As of 30 June 2021, Southwestern University held US$355.4 million of investments.
Here is a list comprising the main questions in his comprehensive investment checklist.
I will provide a brief explanation for each point but you are encouraged to purchase his book for more details.
The first segment of the checklist covers the basics of understanding the business you are looking into.
1. Do I want to spend a lot of time learning about this business?
If the business shows good promise and is easy to understand, it may be worth the investor’s time to dig deeper.
This is a high-level filter that forces you to ask if a business may be too complex or opaque.
If that’s the case, then it may be better to give it a pass.
2. How would you evaluate this business if you were to become its CEO?
This question relates to the investor pretending to take on the role of the CEO of the business that is being researched.
Imagine you need to take over the running of the business and look through all its aspects.
Which areas will you look into and how deep will you go towards understanding the business to satisfy yourself that you are sufficiently knowledgeable about it?
3. Can you describe how the business operates in your own words?
If the business cannot be described in simple terms, this implies that it may be too complex to understand easily.
It may also be dealing with products which are too technical for the layman to comprehend.
4. How does the business make money?
A seemingly basic question, but a necessary one to answer convincingly.
Some businesses go through a complex web of transactions to earn their money.
Or, it may not be readily apparent to the investor how exactly the company makes money.
If you are ever in doubt as to how a company generates its profits, it’s best to walk away.
5. How has the business evolved?
A business which stays static is doomed to fail.
The business and macroeconomic environment are dynamic and continuously evolving.
An investor should learn how a business has evolved over the years to respond to new trends or challenges, and whether it has been successful in doing so.
6. In what foreign markets does the business operate, and what are the risks of operating in these countries?
The company may have exposure to countries that may have unique legal, regulatory, political or operating risks.
You should have an idea of the regions of the world that your portfolio is exposed to.
Furthermore, you should go one step further to assess the risks in each jurisdiction where the company earns a significant portion of its revenue.
The next part of this series will look into the customer perspective for the business and the questions relating to that perspective.
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Disclaimer: Royston Yang does not own any of the companies mentioned.
