Today we want to take a look at one of the latest books that we have read, namely “The Investment Checklist; The Art of In-Depth Research” which is written by Michael Shearn. The book is around 330 pages long, well written in and quite easy to understand. As a rating we would suggest 4.5 of 5 stars.
The book has 11 chapters and deals with the systematization of the investment process. According to the author this systematization is necessary because of the fact that investors make the most mistakes when they rush into an investment idea without doing the proper work to understand the value of a business. The investor is betting in probabilities that certain assumptions will work out, instead of basing their investment decision on real analysis.
The key to be better investor is to truly understand the value of a business and where it creates its value by answering questions about it.
The aim of the book is to make the research process which leads us to these insights manageable. The key to this lies in finding questions, some of which you might not be able to answer. These questions should help you understand the business as if you’re the business owner and help move you away from thinking of stocks as pieces of paper. This by the way, is totally in line with the thinking of Warren Buffett and his business owner concept.
The book is divided into 11 chapters, whereas the chapter 1 outlines a strategy finding research- and ideas. On of the key points in the research process of new ideas is to look in areas of the stock market where capital is scarce. Scarceness of capital creates less competition for assets, which decreases prices. Ask yourself, from which areas of the stock market are investors fleeing, and why? In most of these cases, investors automatically assume the worst-case scenario and tend to sell stocks first and ask questions later. But you have to check if the outlook and the sources of pessimism are temporary or permanent. As an example you can take a look at the utilities business in Germany.
Chapter 2 deals with the questions on how a business earns money. The author gives good advice; instead of over-investing in a process that yields less return, try to develop a deeper understanding of businesses you genuinely care about. Chapter 3 demonstrates the importance of understanding the business from the customer’s perspective rather than your own. Chapter 4 helps the reader to evaluate the strengths and weaknesses of a business. Chapter 7-9 help you to understand the motivations of a management team and how you can assess if it is working in the favor of the equity investor or its own. At the end of the book chapter 10 to 11 deals with the evaluation of growth and M&A. I think in the last 4 chapters is of the most value for me as a reader, because I was totally unaware of the fact how important the management of a company is for the future value creation. .
The book is a great read and very valuable. The main focus clearly lies on improving the system of the research process of the investor, furthermore the book shows you how you ask the right questions in terms of business practice and interviewing the management of a company. For this reason we highly recommend to read the book.