“The better decision maker has at his/her disposal repertoires of possible actions; checklists of things to think about before he acts; and he has mechanisms in his mind to...  bring these to his conscious attention" (Herbert Simon, Nobel Laureate)

Have you ever made impulsive investment decisions that you soon came to regret? Have you ever wished that you had a better process and set of criteria to apply before a stock purchase or sale? We spoke recently about the emphasis placed by our old friends, Mr Buffett and Mr Munger, on the idea of opportunity costbut right up next to it in their repertoire is the use of a checklist approach to investing.

A checklist???

You might think that such a "lowly" tool is far too mundane for a billionaire like Munger to regard as an essential component of success. Well, you'd be wrong... As a recent bestseller - 'The Checklist Manifesto' has discussed, many professions have reduced the risk of catastrophic failure complex decision-making processes by utilising simple checklists. Fighter pilots use checklists all the time, for good reason and why should managing an investment portfolio be any different? Indeed, when it's your own financial future on the line, surely the pressure is even greater to make correct decisions.

In light of this, we have now taken the checklist principle as a core part of Stockopedia Premium and applied it to the stock market, inverting traditional Stock Screening in the process. Sign up now to a free two-week of Stockopedia Premium's data & screening tools to check it out!

Why are checklists so useful? 

The reason why checklists are important is that they catch mental flaws of memory and attention and thoroughness inherent in all of us. Our brains are designed to arrive at answers quickly by taking short-cuts. As Mohnish Pabrai notes, "when you see the lion, you run. You don’t  process your options, you just run". Our in-built biases can be useful sometimes, but also dangerous at other times.

Checkilsts help us cope with the limits of our memory - we can only retain a few things at a time but the that limit is not necessarily the gold standard for what it takes to get things done. Checklists also help us to counter biases that might get in the way…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here