Bruce Berkowitz’s checklist for investing

Legendary investor Bruce Berkowitz has made a fortune for himself and his investors. This simple checklist is one of his secrets.

Bruce Berkowitz is an investing legend. A former star at Lehman’s, he setup his own fund, Fairholme Capital Management, in 1997 and went on to win accolades and riches galore, among them, Fund Manager of the Decade.

For all that kudos, Berkowitz's investing style is simple. At a recent conference he outlined a checklist for investing, a simple filter through which he runs potential investments.

  1. Can you kill it? Cyclicality and spurts of growth can be mistaken for quality. He advocates a test to determine what it will take to kill a business. This exercise illuminates true competitive advantage; McDonalds won’t die because someone makes a better burger. Location, advertising and brand are what make it mighty. Similarly, Google, today a titan, is vulnerable to a better search algorithm.
  2. Is the company essential? No matter how profitable a business is today, if its success depends on subsidies, loopholes or tax treatment, it’s vulnerable. Businesses like McMillian Shakespeare take note.
  3. What can the company make? Berkowitz tries to estimate the potential of a business. This can be hard; who would have expected Apple’s iPad to turn into the raging success it is? But methodically going through this process can eliminate false hopes and uncover new potential.
  4. Is management honest? Good management will not always guarantee a good investment but bad management will always end in disaster. This is more a test of management’s honesty than quality. The point is to avoid dishonest bosses.
  5. Catalysts? Cheapness can be justified in many ways. Berkowitz makes sure he understands why the market has discounted a stock, and then tries to imagine how that problem may be solved. Is an asset sale, a cyclical turnaround or a breakup likely? The important point here is that problems aren’t simply to be avoided – they are opportunities.

Following this checklist may not make you a billionaire, but it is a helpful starting point for improving your skills.

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