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The World’s Best Investing Checklist

Peter Kaufman has done an amazing job compiling some of the world’s best lessons on investment behaviour into a masterpiece. We know it as “Poor Charlie’s Almanack“, which is a collection of speeches and talks by Charlie Munger.

While the entire book is one amazing journey through the mind of one the greatest investment and behavioural thinkers of our times, one part that takes the cake is where Kaufman has condensed Munger’s teachings into a checklist.

He calls this “Investing Principles Checklist”, as it contains the core principles that has made Munger the brilliant investor he is today.

These principles can further be condensed into four most basic guiding principles of life and investing – Preparation. Discipline. Patience. Decisiveness.

These principles cannot be prioritized in terms of any importance. Rather, together, they make up a sensible, thinking, and disciplined investor’s mental toolkit.

Munger’s Investing Principles Checklist
1. Risk – All investment evaluations should begin by measuring risk, especially reputational.

  • Incorporate an appropriate margin of safety
  • Avoid dealing with people of questionable character
  • Insist upon proper compensation for risk assumed
  • Always beware of inflation and interest rate exposures
  • Avoid big mistakes; shun permanent capital loss

2. Independence – “Only in fairy tales are emperors told they are naked.”

  • Objectivity and rationality require independence of thought
  • Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
  • Mimicking the herd invites regression to the mean (merely average performance)

3. Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights.”

  • Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
  • More important than the will to win is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • If you want to get smart, the question you have to keep asking is “why, why, why?”

4. Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom.

  • Stay within a well-defined circle of competence
  • Identify and reconcile disconfirming evidence
  • Resist the craving for false precision, false certainties, etc.
  • Above all, never fool yourself, and remember that you are the easiest person to fool
  • “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

5. Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions.

  • Determine value apart from price; progress apart from activity; wealth apart from size
  • It is better to remember the obvious than to grasp the esoteric
  • Be a business analyst, not a market, macroeconomic, or security analyst
  • Consider totality of risk and effect; look always at potential second order and higher level impacts
  • Think forwards and backwards – Invert, always invert

6. Allocation – Proper allocation of capital is an investor’s number one job.

  • Remember that highest and best use is always measured by the next best use (opportunity cost)
  • Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
  • Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven

7. Patience – Resist the natural human bias to act.

  • “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
  • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
  • Be alert for the arrival of luck
  • Enjoy the process along with the proceeds, because the process is where you live

8. Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction.

  • Be fearful when others are greedy, and greedy when others are fearful
  • Opportunity doesn’t come often, so seize it when it comes
  • Opportunity meeting the prepared mind; that’s the game

9. Change – Live with change and accept unremovable complexity.

  • Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
  • Continually challenge and willingly amend your “best-loved ideas”
  • Recognize reality even when you don’t like it – especially when you don’t like it

10. Focus – Keep things simple and remember what you set out to do.

  • Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
  • Guard against the effects of hubris (arrogance) and boredom
  • Don’t overlook the obvious by drowning in minutiae (the small details)
  • Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
  • Face your big troubles; don’t sweep them under the rug

In the end, it comes down to Munger’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness.

Anyways, out of these principles, is anything missing from your investment life?

If yes, what is it and what are you doing to plug in the gap? Let me know in the Comments section below.

P.S. The next issue of my review of Warren Buffett’s letters will appear next Friday.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. When talking of Preparation, Discipline, Patience & Decisiveness in stock market investing, it would be wise to remember the concept of Three Cs. – Cash. Courage & Crisis
    i.e.
    CASH combined with COURAGE in a CRISIS is priceless.
    A good example which is very fresh in Indian investor’s memory is 2009 lows of Indian markets.
    That was the time of CRISIS. Real bottom and times of maximum pessimism. If at that time, someone had the COURAGE to put in some money (CASH) into some good stocks, we all know what returns were offered by the markets.

  2. Thanks Vishal, good one!

    I really like the way he tells when it is especially important to focus on these principles, and how the message comes out – “no one is perfect, just try to make sure you don’t get hurt by your weaknesses, and your strengths will take you to heights then” 🙂

  3. Vishal,

    Thanks for this post. I think all of these points are behavior related and I especially liked “Be a business analyst, not a market, macroeconomic, or security analyst “. This says it all.

    About independence – New investors always look for “confirmation bias” where they don’t know they are right or wrong, so they look elsewhere just to confirm that they are right.

    What do you have to say on this?

  4. what am I missing? most likely all of the above 🙂 thanks for the post.

  5. Another wonderful list.
    In fact a lot of what I read on the site, in some of the posts contributed by other tribesmen, excellent books recommended / reviewed most of it is so very applicable to life in general irrespective of whether you are a professional, businessman or a worker.
    Thank you all.

  6. hmm..yes..this 10 point checklist says it all. Always following these would make us a better investor/person. I doubt that at some point in time, many of us might not strictly adhere to all these points.

  7. Manish Sharma says:

    The analytic rigour, proper allocation of capital and decisiveness are some of the things I have to work upon. I have realised that decisiveness is the toughest part, investing is a game of decision-making skills and art of choosing play a major role. If anyone among the tribe, or Vishal can throw more light on analytical rigour and proper allocation than that would be beneficial for many.

    Also, I feel that traits like patience, focus, adaptability and intellectual humility are some of the things that are part of a person’s character and temperament, and in investing these factors are equally important to pay attention to. But, I have observed very few people consider these things of any significance.

  8. Vishal, do you have “Poor Charlie’s Almanack”. If yes how much did you get it for?

Trackbacks

  1. […] you are not willing to work on creating the right investing process that suits you – and just rely on the readymade stuff available out there – you face a great […]

  2. […] Almanack, Peter Kaufman has condensed Munger’s teachings into a checklist. He calls this “Investing Principles Checklist”, as it contains the core principles that has made Munger the brilliant investor he is today. […]

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