The benefits of an investor checklist

In 1935, three aircraft manufacturers were in the running for a major US military contract of up to 200 planes.  

Boeing was one of the manufacturers, and had submitted their Model 299. In the initial tests, Boeing had run rings around the competition, but in final testing, the plane went down killing two people and injuring three. 

After some investigations, it was revealed that the reason for the crash was that the pilot had forgotten to release the ‘gust lock’ before take-off. 

As a result of the tragedy, the contract was awarded to the runner up. In addition, if Boeing was to continue with the Model 299 in future contracts, they had to work out a way of preventing this type of error from ever happening again. 

After some hard thinking, the pilots came up with what is now known as the ‘Aviation Checklist’, an idea which is still in use today. It comprises four separate checklists, one each for take-off, flight, before landing and after landing. 

For Boeing, the checklists worked perfectly, and they began winning contracts. Eventually, 12,731 orders of the Model 299 were made. The plane was renamed the B-17 Flying Fortress and was a major force in every theatre of WW2. 

Today, no pilot will take off without going through their checklist. 

Checklists 

A checklist in its most basic form, is a list of items that helps us to remember what we need to do. Checklists can also be used to ensure consistency and completeness of a task. 

Some examples of common checklists include to-do lists, schedules, rosters, project plans, recipes, and shopping lists. 

Checklists can also be used to great effect in investing. Charlie Munger has a simple 4-step checklist that he uses whenever he buys a stock. 

The four steps are: 

1. Do I understand the business? 

2. Does the business have a durable competitive advantage? 

3. Does the management have integrity and talent? 

4. Does the price make sense, and is there a margin of safety? 

If the stock passes all these four steps, then Munger will then work through a more detailed checklist where he examines other business factors, such as the risks in the regulatory environment. 

Munger also has a 10-point ‘Investing Principles’ checklist which includes: 

1. Always measure risk. 

2. Think independently. 

3. Be prepared and work hard. 

4. Practice intellectual humility. 

5. Use analytical rigor. 

6. Properly allocate capital. 

7. Be patient. 

8. Act with decisiveness when the right opportunity presents itself. 

9. Live with change, and adapt to it. 

10. Stay focused. 

Passive Investments 

If you prefer to invest passively via a PMA (Professionally Managed Account), then a checklist can also be used. 

To construct this checklist, I sought the help of Mitchell Sneddon, Head of Portfolio Services at InvestSMART. 

According to Mitch, there are six key items that one should check off before investing in a PMA: 

1. Does the investment align with my financial goals? 

2. Does the portfolio that I’ve selected, align with my risk profile? 

3. Do I understand that despite regular volatility, over time the general direction of the share market is up? 

4. Am I confident enough to ride out the bumps in the share market? 

5. Do I want to regularly add funds to my PMA via regular contributions? 

6. Am I the legal owner of the shares? (With PMAs the answer is always Yes.) 

Conclusion 

Whatever the situation, whether it be at work, at home, investing, or on an aircraft, checklists are a great way to ensure that everything we want covered off, is covered off. 

In investing, whether it be active or passive, checklists make a huge amount of sense and importantly, help us to achieve a much better financial outcome.