A really good checklist before pressing “buy”.

1. Final
Decision
Checklist
Thursday,
January
3,
2019
Joe
Kostner
I
had
previously
mentioned
a
checklist
that
I
use
as
the
last
thing
I
look
at
before
making
an
investment
in
a
stock.
As
I'm
thinking
about
spelling
out
my
process
and
philosophy
in
regards
to
forming
a
potential
Registered
Investment
Adviser,
I
thought
I'd
clean
up
the
wording
a
bit,
and
paste
it
here
if
anyone
else
is
interested.
One
important
note
though:
I've
come
to
believe
that
developing
a
full
image
in
one's
mind
of
how
a
business
operates,
competes,
allocates
capital,
takes
care
of
customers,
etc.
is
much
more
important
than
checking
off
certain
items
on
a
list
(i.e.
Holograms
>
Checklists).
Combined
with
developing
that
image
is
the
necessity
of
only
investing
in
those
things
that
seem
like
obvious
bargains.
But
the
final
checklist
serves
as
a
great
way
to
help
stay
disciplined,
and
hopefully
sidestep
some
avoidable
errors.
Everyone's
will
probably
be
different
and
evolve
over
time,
but
here
is
mine
in
its
current
state.
Final
Decision
Checklist
(The
final
checklist
to
go
through
before
putting
any
capital
to
work)
1.
Are
you
tired?
• "We
didn’t
know,
when
we
started
out,
this
modern
psychological
evidence
to
the
effect
that
you
shouldn’t
make
a
lot
of
important
decisions
when
you’re
tired
and
that
making
a
lot
of
difficult
decisions
is
tiring....
I
cannot
remember
an
important
decision
that
Warren
has
made
when
he
was
tired."
–
Charlie
Munger
2.
Did
you
make
this
investment
decision
while
the
market
was
closed,
so
that
current
price
moves
aren't
impacting
your
judgment?
• “Sleep
on
it”
is
good
advice
before
buying/selling.
3.
Have
you
done
enough
work,
and
are
you
sure
this
is
within
your
circle
of
competence?
• "We
will
never
buy
anything
we
don’t
think
we
understand.
And
our
definition
of
understanding
is
thinking
that
we
have
a
reasonable
probability
of
being
able
to
assess
where
the
business
will
be
in
10
years."
–Warren
Buffett

2. 4.
Is
the
balance
sheet
conservative
to
allow
the
company
to
endure—and
hopefully
take
advantage
of—even
the
most
difficult
of
economic
environments?
5.
Is
the
management
team
comprised
of
the
kind
of
people
you
want
to
partner
with,
and
are
their
interests
clearly
aligned
with
your
interests?
• It’s
not
worth
being
business
partners
with
people
you
don’t
like
and
admire,
and
as
an
owner
of
the
business
they
are
running,
you
are
essentially
their
partner.
6.
Is
this
a
good
business?
• It
doesn't
necessarily
have
to
be
a
long-­‐term
"compounder"
type
of
business,
but
it
needs
to
provide
real
value
for
its
customers,
clients,
etc….
i.e.
a
Win-­‐Win
with
all
six
counterparties
(customers,
suppliers,
employees,
owners,
the
regulators,
and
the
community).
• “Win-­‐win
is
as
much
safety
as
it
is
compassion.
The
sustainability
of
any
organization
ultimately
rests
on
delivering
a
win-­‐win
partnership
with
counterparties.
Any
other
relationship
will
eventually
lead
to
a
fatal
flaw
that
will
eventually
be
corrected.
Be
constant
–
Be
Kind.”
–Chris
Begg
7.
Do
you
have
downside
protection?
This
will
largely
come
from:
• Paying
close
to
(adjusted)
net
asset
value,
encompassed
within
a
business
that
has
solid
earning
power
(even
if
temporarily
obscured)
and
some
advantages
protecting
that
earning
power,
even
if
it’s
within
a
cyclical
business
and
the
size
of
the
moat
may
be
hard
to
estimate.
• A
moat
that
protects
a
minimum,
and
conservatively-­‐estimated,
level
of
earnings—and
then
paying
a
fair
to
good
to
great
price
for
that
level
of
earnings.
The
price
paid
will
largely
be
a
judgment
call
based
on
the
size
of
the
moat
and
the
reinvestment
prospects
within
that
moat
(i.e.
ability
to
invest
capital
at
high
rates
for
a
given
duration
of
time).
• And
while
a
judgment
call
on
quality
vs.
price,
remember
that
it
should
look
obvious
if
you
have
a
full
picture
of
things:
“Part
of
the
reason
that
we
have
a
decent
record
is
[that]
we
pick
things
that
are
easy.
Other
people
think
they're
so
smart
they
can
take
on
things
that
are
really
difficult.
That
proves
to
be
more
dangerous.
You
have
to
be
shrewd,
and
you
have
to
be
very
patient.
You
have
to
wait
until
something
comes
along
which
at
the
price
you're
paying
is
easy.”
–Charlie
Munger

3. 8.
When
thinking
about
price
vs.
value:
• Is
there
at
least
three
times
more
upside
than
downside?
(e.g.
If
downside
under
a
worst-­‐case
scenario
is
50%,
I
need
at
least
150%
[2.5x
return]
upside.)
• Do
I
think
this
investment
is
likely
to
double
in
3-­‐5
years?
(~15-­‐26%
IRR)
• And
if
I'm
wrong,
is
there
a
high
probability
that
my
downside
is
waiting
10
years
(because
it’s
a
good
business
that
is
growing)
for
a
double
as
opposed
to
losing
money?
(~7%
IRR)
• There
may
be
some
situations
where
your
downside
is
so
limited
if
you
can
hold
longer-­‐term
that
even
if
the
expected
IRR
may
be
15%
over
a
2-­‐3
year
period
instead
of
longer,
it
could
still
be
worthwhile
(e.g.
A
bond
you
know
with
extremely
high
confidence
will
pay
off
at
maturity,
and
you
can
hold
until
maturity;
Or
at
times,
buying
Berkshire
Hathaway
at
a
low
multiple
of
understated
book
value,
and
also
a
decent
discount
to
fair
value.).
• One
of
the
main
advantages
you
can
have
as
an
investor
is
looking
out
5-­‐
10
years
when
thinking
about
value—as
opposed
to
thinking
shorter-­‐term—
and
comparing
that
value
to
the
price
today.
9.
Is
this
business
almost
certain
to
be
making
more
money
10
years
from
now,
and
can
it
increase
its
long-­‐term
value
in
a
tough
economic
environment
(e.g.
by
buying
stock,
taking
businesses
from
weaker
competitors,
treating
weaker
customers
and
suppliers
well
in
order
to
build
long-­‐term
trust,
etc.)?
• Downside
via
a
current
moat
or
asset
value
isn't
enough….
The
business
must
also
be
something
that
is
almost
certain
to
be
making
more
money
in
10
years.
All
six
key
investment
traits
should
be
present—to
varying
degrees
and
sometimes
temporarily
obscured
(unless
it’s
a
special
situation
investment
with
a
given
catalyst):
o Downside
o Cash
Flow
(Sustainable
Earning
Power)
o Growth
(Reinvestment
Opportunities)
o Antifragile
(ability
to
take
business
advantage
in
tough
environments,
even
though
the
stock
may
go
down
with
a
declining
market)
o People
o Price

4. 10.
Am
I
viewing
this
as
a
business
and
not
just
a
stock?
Am
I
taking
the
mindset
of
buying
the
business
outright,
and
retaining
management?
• "[Charlie
and
I]
don’t
consider
ourselves
richer
or
poorer
based
on
what
the
stock
does.
We
do
feel
richer
or
poorer
based
on
what
the
business
does."
–Warren
Buffett
11.
Am
I
sizing
the
position
appropriately?
• While
you
need
to
concentrate
your
portfolio
in
your
best
ideas,
you
also
need
to
remember
Howard
Marks'
story
about
the
race
with
one
horse,
where
what
seemed
like
a
sure
thing
wasn't,
because
the
horse
jumped
the
fence
and
didn't
finish
the
race.....
Unexpected
things
happen
and
you
won't
see
them
all
coming.
• The
Marks
story,
via
Peter
Bevelin's
All
I
want
to
know...book:
“It
can
always
get
worse
than
you
think.
I
love
this
story
from
Howard
Marks:
‘I
tell
my
father’s
story
of
the
gambler
who
lost
regularly.
One
day
he
heard
about
a
race
with
only
one
horse
in
it,
so
he
bet
the
rent
money.
Halfway
around
the
track,
the
horse
jumped
over
the
fence
and
ran
away.
Invariably
things
can
get
worse
than
people
expect.
Maybe
‘worst-­‐case’
means
‘the
worst
we’ve
seen
in
the
past.’
But
that
doesn’t
mean
things
can’t
be
worse
in
the
future.’”
• And
it
may
not
be
a
bad
idea
to
only
buy
1/3
of
a
position
at
first,
especially
if
you've
been
following
the
company
for
less
than
6
months.
12.
No
FOMO,
No
Sunk
Costs,
and
No
Acting
Out
of
Boredom.
• You
have
to
be
willing
to
watch
plenty
of
things
you
thought
were
good
but
not
good
enough
go
on
to
perform
well
and
be
indifferent
about
it;
that’s
part
of
the
game.
• You
can’t
let
putting
time
and
effort
into
something
influence
your
willingness
to
invest
in
it—be
ready
to
walk
away
and
move
on,
with
equanimity
to
the
eventual
outcome,
as
soon
as
you
see
something
that
you
don’t
like.
• And
always
do
the
work
before
investing,
realizing
that
you’ll
miss
plenty
of
things
that
go
up
while
you’re
finishing
the
work
that
needs
to
be
done
before
investing
in
anything.
• So,
have
you
done
the
work
that
needs
to
be
done?
And
are
you
sure
you’re
not
settling
just
because
you’ve
put
in
the
work?
• And
remember,
great
investors
have
often
made
mistakes
when
they
either
had
little
to
do
(do-­‐something
syndrome)
or
had
too
much
cash
on
hand.
You
must
stay
disciplined,
and
then
remain
patient
for
however
long
it
takes.