July 27, 2024, 3:04 a.m.
Investing Tools 2: A Warren Buffet Style Investing Checklist
July 17, 2023
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Soul FinancialEverybody needs a good old-fashioned checklist!
 
Simple Yes or No answers to help guide you.
 
Business principles
- Is the business understandable?
- Do you know how the money is made?
- Does the business have a consistent operating history?
- Does the company have favourable long-term prospects?
- Is there a big moat around the business (a high threshold of entry)?
- Is it a business that even a dummy could make money in?
- Can current operations be maintained without too much needing to be spent?
- Is the company free to adjust prices to inflation?
- Have you read the annual reports of the main competitors?
- Has the management demonstrated a high degree of integrity (honesty)?
- Has the management demonstrated a high degree of intelligence?
- Has the management demonstrated a high degree of energy?
- Is management rational?
- Is management candid with shareholders (evidence in the past of open disclosure to the shareholders when there have been problems)?
- Has management resisted the temptation to grow quickly by merger?
- Has management the strength not to follow the institutional imperatives ( avoid following current business and sector fads)?
- Has the business been free of a major merger in the last 3 years ( many merger failures come out of the woodwork within this period)?
- Are stock options treated as an expense?
 
Financial principles
- Is the return on equity adequate?
- Is the company conservatively financed?
- Has the company had a track record of earnings growth in most years above the stock market average?
- Are the profit margins attractive (better than industry)?
- Has the company created at least one dollar of market value for every dollar of earnings retained?
 
Valuation principles
- Is the value of discounted earnings greater than the current market value?
- Have you discounted at a rate equal or greater than the 10 year bond rate (risk free rate)?
- Have cash flows been based on net income, plus depreciation, depletion, and amortization, less capital expenditure and additional working capital requirements?
- Has the company been temporarily punished for a specific risk that is not a long-term risk (the market tends to over punish the share price)?
 
The valuation principles are a bit hard. You can replace them by looking at the following ratios and comparing to the industry norms
- Price-to-Book ratio
- Price-to-Sales ratio
- Price-to-Earnings ratio
- Price-to-Cash Flow ratio
 
Happy Investing!!!