114: Building An Investment Checklist #1
The Zeroth item on your checklist is a pre-question that could save you a lot of time.
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The Pre-Question
The fourth law of thermodynamics is considered so fundamental that it was called the Zeroth Law since the 1st, 2nd, and 3rd were already established. I think the first item on any investment checklist should be such a zeroth checklist item.
“Should I even be looking at this company/stock?” is such an easy question it often gets overlooked.
Here are some questions I like to ask myself when considering a new investment:
How did this company / stock come on my radar screen?
Was it through a screener? Social media? A trusted friend? Is there a level of excitement or bias inherent in where the idea came from that could cloud my judgment?
Do I have an interest in the company / industry? This is another major area I see investors overlook. If I’m just not excited about an industry I probably shouldn’t put myself in a situation where I’m going to half-ass the analysis, no matter how exciting the prospects seem from the outset.
Related questions are: Does it fit within my circle of competence?
If not, is it worth pursuing despite not having an initial interest?
Can I learn something new / expand my circle of competence?
Does it come from a trusted source who has my best interest in mind?
Is the business simple and understandable?
Do I understand how it makes money? The basic economics?
Can I quickly figure this out or will it take lots of reading / research to get up to speed? Is it worth my time?
Is there a better use of my time right now?
Are there other companies I should be looking at that are either more interesting or clearly have the potential to be undervalued?
Should I be spending time deepening my existing circle of competence?
I think it’s only after one asks these pre-questions that the “real” work of security analysis should begin. It’s tempting to jump right into analyzing the business, reading annual reports, etc. And it’s time-consuming to stop and think about these things. But the opportunity cost of just jumping right in could be huge.
Think about these pre-questions as a sort of circuit breaker to slow you down and force some thought about what companies you look at.
What are some of the first questions you ask yourself when a new idea comes on your radar? Let me know in the comments.
Stay rational! —Adam
