Atul Gawande wrote an article called “The Checklist” and it makes an interesting read. In it, he discusses how checklists have helped bring down the rate of infection in Intensive Care Units (ICUs) tremendously. The checklist can be as simple as a five step process. Doctors are to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. As a result of the checklist, the ten-day line-infection rate went from eleven per cent to zero!
Checklists have not really taken off in the medical sector but checklists are being used extensively in the aviation industry. Pilots use it. Aircraft engineers use it. Quality specialists use it. The list goes on. Usage of checklists ensure that errors are reduced and decision-making vastly improves as a result. By using a checklist, it does not make the individual less competent as many believe so. Our memory sometimes can fail us at the most crucial point and that is when a checklist comes in handy. Even the most experienced crew member can forget certain things in a particular situation.
How is the usage of checklists related to investing? Charlie Munger, the partner of Warren Buffett, is a huge advocate of using checklists. He has said in his book, Poor Charlie’s Almanack, that “effective checklists minimizes errors and omissions”. There’s an investment book entitled “The Investment Checklist: The Art of In-Depth Research” by Michael Shearn that is dedicated entirely to value investing using checklists. In investing, usage of checklists help to keep emotions in check. Emotional stability is extremely paramount to investment success. Emotions can take over cognition without us realising it. When our company’s stock price falls, we can take out a checklist that we have prepared to see if the panic we are feeling is warranted for.
Personally, I use a four-page checklist before I invest in any businesses. Usage of such a checklist ensures that I do not omit important steps that may impact the sound analysis of the business. Do come up with your own investment checklist and see how that improves your investments. A simple five-step checklist has helped to bring down infection rates in ICUs tremendously and I’m sure an investment checklist will help you too!
6 thoughts on “The Importance of Checklists”
I agree 110%.. no matter what stock you invest/trade you should have a set of checklist to see if it is sound investment, some sort of prevention to get into the wrong trade. It reduce risk so so much. However, the problem is people tend not to follow what they “check” , another is it is much harder for people to follow the checklist as a newbie.
Can you share with us your investment check list.
Wow, a 4 page checklist!! My checklist is only about 6-7 pointers before I read further about a company to see if there are risks i should be aware of.
You apply the checklist across the board? Wouldn’t a growth company and matured but stable company yield very different results from your checks? Even companies from different sectors might cause some checks to be affected… How do you managed? e,g, when i look at FCF and debts, I have to expect property devlopers to have debts levels that are volatile and FCF to be lumpy… or you will look off such businesses that required high capex or is cylical??
Lastly, would you mind sharing your checklists? I am sure it will be a good read!! Hope I am not asking for too much. Thanks
Thanks for your comments. I’m not inclined to sharing my checklist on a public domain. Sorry about that.
Basically, my checklist consists of what to look out for the Warren Buffett way. The book I mentioned in the post will be a good read. I read it myself and it’s very comprehensive. It’s much longer than the 4-page checklist!
How about my earlier question? Do u apply the criteria across the board?
My checklist is not company or industry specific. It just states the matrices I look out for and once I have looked it up, I put a ‘Yes’ in the specific column.