The Investment Checklist by Michael Shearn
The Investment Checklist by Michael Shearn
? Do I want to spend a lot of time learning about this business?
? How would you evaluate this business if you were to become
its CEO?
? Can you describe how the business operates, in your own
words?
? How does the business make money?
? How has the business evolved over time?
? In what foreign markets does the business operate, and what
are the risks of operating in these countries?
? Who is the core customer of the business?
? Is the customer base concentrated or diversified?
? Is it easy or difficult to convince customers to buy the products
or services?
? What is the customer retention rate for the business?
? What are the signs a business is customer oriented?
? What pain does the business alleviate for the customer?
? To what degree is the customer dependent on the products
or services from the business?
? If the business disappeared tomorrow, what impact would
this have on the customer base?
Industry
? Does the business have a sustainable competitive advantage
and what is its source?
? Does the business possess the ability to raise prices without
losing customers?
? Does the business operate in a good or bad industry?
? How has the industry evolved over time?
? What is the competitive landscape, and how intense is the
competition?
? What type of relationship does the business have with its
suppliers?
? What are the fundamentals of the business?
? What are the operating metrics of the business that you need
to monitor?
? What are the key risks the business faces?
? How does inflation affect the business?
? Is the business’s balance sheet strong or weak?
? What is the return on invested capital for the business?
Evaluating the Distribution of Earnings (Cash Flows)
? Are the accounting standards that management uses conservative
or liberal?
? Does the business generate revenues that are recurring or
from one- off transactions?
? To what degree is the business cyclical, countercyclical, or
recession-resistant?
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? To what degree does operating leverage impact the earnings
of the business?
? How does working capital impact the cash flows of the business?
? Does the business have high or low capital- expenditure
requirements?
Classification: Who Are They?
? What type of manager is leading the company?
? What are the effects on the business of bringing in outside
management?
? Is the manager a lion or a hyena?
? How did the manager rise to lead the business?
? How are senior managers compensated, and how did they
gain their ownership interest?
? Have the managers been buying or selling the stock?
Management Operates the Business
? Does the CEO manage the business to benefit all stakeholders?
? Does the management team improve its operations day- to- day
or does it use a strategic plan to conduct its business?
? Do the CEO and CFO issue guidance regarding earnings?
? Is the business managed in a centralized or decentralized way?
? Does management value its employees?
? Does the management team know how to hire well?
? Does the management team focus on cutting unnecessary
costs?
? Are the CEO and CFO disciplined in making capitalallocation
decisions?
? Do the CEO and CFO buy back stock opportunistically?
Traits
? Does the CEO love the money or the business?
? Can you identify a moment of integrity for the manager?
? Are managers clear and consistent in their communications
and actions with stakeholders?
? Does management think independently and remain unswayed
by what others in their industry are doing?
? Is the CEO self-promoting?
? Does the business grow through mergers and acquisitions, or
does it grow organically?
? What is the management team’s motivation to grow the
business?
? Has historical growth been profitable and will it continue?
? What are the future growth prospects for the business?
? Is the management team growing the business too quickly or
at a steady pace?
? How does management make M&A decisions?
? Have past acquisitions been successful??