Checklists

23rd Apr '23 by MattH

21 comments 1233 reads

I am sure we have all seen the Charlie munger quote about pilots and checklists many times on here, but who actually uses one before a share purchase? Inspired by recent events with WANdisco (LON:WAND) , iEnergizer (LON:IBPO) and Kape Technologies (LON:KAPE) I think I need to be more methodical and use one. Would anyone care to share theirs?

Mine is a work in progress;

stock rank above 75
F score above 6 (maybe 5, but first 3 results must be green)
No short screens
Check major shareholder list. No one share holder above 33%ish.? Free float above 20/30%?
Check the shorts. Should be under 2% short and definitely not in top 10.
Don’t buy more than 1/3 of the average Daily volume (for liquidity).
Don’t buy foreign companies listed in UK especially on Aim

I’m more than open to criticism and advice here, and I’d really like to see what other people do. I am sure this list would cut out some possible (historical) winners like Plus500 (LON:PLUS) or good companies like Goodwin (LON:GDWN) but I’m more interested in missing the banana skins nowadays. I know my strengths and forensic accounting and deep dives are not it.

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MattH

23rd Apr '23

I am ok with conservative nowadays really.
F score is something I have been not just starting really exploring. Which types of companies would it not be suitable for?

andrewdb

24th Apr '23

It works better on

smaller Cos (bottom half of market)
ones that are cheap on a price / book value basis (cheaper 20% of market)

There is a pretty good readable explanation here

https://www.chicagobooth.edu/~...

in the original paper

However it is applied to almost anything in the wild.

Caduceus

16th May '23

So, question for you all fundies. We all hear all these great traders going on about they always look at Earnings, Sales and Margins. My question is, what are the 3 lines we look for in a StockReport that reflect these 3 areas in their finest most readable format (as there's 2 EPS lines for a start!)! Thanks in advance

WarrantStar

Caduceus. I don't know if I am a Fundy. What is it? Anyway I will attempt to answer your question. Sales is near the top of the stock report in the Financial Summary and is shown as "Total Revenue." Margin is shown in the profitability section as "Operating Margin." Earnings is shown in the Financial Summary as "EPS Normalised."

BnB

As a 4th essential for long term investment, I would also look for ROCE, listed under “Profitability”

Thank you my friend, it seems a stupid question but one that I have always failed to visualise properly for some reason. I appreciate it.

Thank you for this little extra, its gone on my list. Im mainly a techy (technical analysis kinda guy) but I want to learn more fundie (fundamentalist) skills!

immortaleye

9th Jun '23

I do use one but it is nothing special. Just the one Robbie Burns of Naked Trader suggests in his book. So far, combined with a little common sense it seems to have got me by

cheeky_minnows

11th Jun '23

Can I add - Read the latest annual report.

I have been quite surprised at the amount of information that companies do put in their annual reports, and it can often give a good flavour of what they are about. Yes alot of it can be skipped through quickly, but often there is a risk analysis that can give a couple of pointers into what else to look into.

You mention iEnergizer - I wonder how many people that invested in this business looked at the annual report. If you have a look, it is almost as though the company is trying to hide its activity. It is certainly not trying to engage its shareholders.

The Beeks Financial Cloud (LON:BKS) annual report looks like the CEO read too much Biggles Flies Again as a kid...

Anyway, my tuppence worth.

12th Jun '23

I will be at the extreme end of the answers to your question. I have a rigorous process which I always follow before buying anything. This requires me to answer 200+ questions. I have spent a massive amount of time improving my process over the last ten years. It serves me well and I keep improving it all the time. I am happy to spend 3 or more hours a day following it or improving it. An important part of the process is to tell me whether I should be increasing or reducing my holdings, or maybe exiting the market completely. I significantly beat my chosen benchmark over all periods over 6 months. I will not share the details of my process. But, if anyone is interested, I would be prepared to summarise the main elements of it.

Brilliant Leader

I would be interested in a summary of your process WarrantStar - thanks in advance.

doug2500

13th Jun '23

I also would be very interested please.

Rusty2

I also would be interested.

Ok I will post a summary later today.

So here are the main elements of my process. Please do not ask for me for lots of detail.

1)Daily review of the market by analysis of my benchmark index. How does the index value compare to the moving average that I have chosen for it? Look at the number of advancers & decliners. Decide whether I am in Buy / Hold / Sell some / Sell all mode.

2)A good hunting ground is recent trading updates and outlook statements. Look for comments like “will exceed current market expectations”.

3)Look for FY1 & FY2 EPS to be rising

4)List the values of selected quality metrics for a particular share

5)Calculate what I expect the share price to be in 12 months from now. Look for shares with large percentage increase in value over the next 12m.

6)Make two summary lists for each share. Reasons to Buy, and Reasons not to buy.

7)Compare the two lists and make a decision, and arrive at a conviction level.

8)Execute the trade.

9)Continue to hold until either: a) The company is not performing or b) General market conditions tell me to sell as in point 1) above.

The process is not perfect. I will always be investigating improvements to it. I hope that the above may prove helpful to some of you.

Thanks WS, an interesting approach and some food for thought

DavidMcCabe

14th Jun '23

Makes a lot of sense, thank you. David

That's very interesting thanks.

Hopefully you won't mind some follow up, but general questions:

What sort of holding period do you expect to have? Or have on average?

Do you find yourself holding a lot of cash at times? You imply it might not be that unusual for you to sell everything sometimes.

How big is your investable universe? It sounds like each stock gets a bit of work so I guess you're not looking at the whole of UK?

Feel free not to answer. Thanks, Doug

OK Doug. Your questions are sufficiently general for me to be willing to answer them.

Typical holding period depends on market conditions. Very variable. About 4 months. I have been 100% cash for periods when I consider market conditions to be unsuitable. Market caps would typically be from £50m to £2000m. It's 100% UK. I exclude all Financials, Energy, Metals & mining, Oil & gas related.

Thanks for that, I'm always interested in peoples processes.

I'm probably very different to you, not taking much of a macro view and holding indefinitely but that's not worked out so well recently! There's always something to learn.

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MattH

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