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Investment Principles and Checklists Ordway

Investment Principles and Checklists Ordway

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Published by evolve_us
A value investing checklist with reference and quotes from famous investors
A value investing checklist with reference and quotes from famous investors

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Published by: evolve_us on Aug 19, 2012
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05/08/2014

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INVESTMENT PRINCIPLES & CHECKLISTS
“You need a different checklist and different mental models for different companies. I can never make it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of  your life.” 
– 
Charlie Munger
Table of Contents
Table of Contents...........................................................................................................................................................1PROCESS......................................................................................................................................................................2PLACES TO LOOK FOR VALUE..............................................................................................................................5KEY CONCEPTS FROM GREAT INVESTORS.......................................................................................................8Seth Klarman’s Thoughts on Risk............................................................................................................................8“Becoming a Portfolio Manager Who Hits .400” (Buffett)......................................................................................8An Investing Principles Checklist ............................................................................................................................9Charlie Munger’s “ultra-simple general notions”...................................................................................................10“Tenets of the Warren Buffett Way”......................................................................................................................10Howard Marks and Oaktree....................................................................................................................................11Phil Fisher’s 15 Questions.......................................................................................................................................14And more Fisher: 10 Don’ts:...................................................................................................................................14J.M. Keynes’s policy report for the Chest Fund, outlining his investment principles...........................................15Lessons from Ben Graham......................................................................................................................................15Joel Greenblatt’s Four Things NOT to Do.............................................................................................................17Greenblatt: The process of valuation......................................................................................................................17How does this investment increase my “look-through” earnings 5-10 years in the future? (Buffett)...................18Ray Dalio on “The Economic Machine”................................................................................................................18Why Smart People Make Big Money Mistakes (Belsky and Gilovich).................................................................19Richard Chandler Corporation’s Principles of Good Corporate Governance........................................................20Tom Gayner’s Four “North Stars” of investing......................................................................................................20David Dreman’s “Contrarian Investment Rules”...................................................................................................21Principles of Focus Investing .................................................................................................................................23Lou Simpson............................................................................................................................................................24Don Keough’s “Ten Commandments for Business Failure”.................................................................................24Jim Chanos’s value traps.........................................................................................................................................25Major areas for forensic analysis (O’Glove)..........................................................................................................25Seven Major Shenanigans (Schilit).........................................................................................................................25Walter Schloss: “Factors needed to make money in the stock market”.................................................................26Chuck Akre’s criteria of outstanding investments..................................................................................................27Bill Ruane’s Four Rules of Smart Investing ..........................................................................................................27Richard Pzena..........................................................................................................................................................28Sam Zell’s “Fundamentals”....................................................................................................................................29Thoughts from Jim Chanos on Shorting.................................................................................................................29James Montier’s 10 tenets of the value approach...................................................................................................31James Montier: The Seven Immutable Laws of Investing ....................................................................................32Jeremy Grantham’s “Investment Advice [for individual investors] from Your Uncle Polonius”........................32Sir John Templeton’s “16 Rules for Investment Success”.....................................................................................32Four sources of economic moats (all of which much be durable and be hard to replicate) (Sellers)....................33Seven traits shared by great investors (Sellers)......................................................................................................33APPENDIX – OTHER CONSIDERATIONS AND DATAPOINTS........................................................................33
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Good checklists
are precise, efficient, easy to use even under difficult conditions, do not try to spell outeverything, and provide reminders of only the most critical and important steps; the power of checklists islimited
o
Bad checklists
are vague, imprecise, too long, hard to use, impractical, and try to spell out everysingle step
 Do-confirm
checklist: perform jobs/tasks from memory and experience, but then stop, run the checklistand confirm that everything was done correctly
 Read-do
checklist: carry out tasks as they are checked off – more like a recipe
PROCESS
Focus on original source documents, working from in to out 
SEC fillings
o
Read 10-Qs, 10-Ks, proxies and other filings in reverse chronological order 
Press releases and earnings calls/transcripts
Other public information
o
Court documents, real estate records, etc.
Industry publications
Third-party analysts
o
Sell-side research only as a consensus-checking exercise
Research the company’s competitors
with the same process
o
Research and speak to competitors, (former) employees, and people in the supply chain
Estimate valuation before looking at market valuation
o
Valuation
 – 
 
What would a rational, long-term, private buyer would pay in cash today for the entire business?
Asset value
Earning power
if EP >NAV, then franchise value
Growth value
Requirements
o
Large, well understood margin of safety
o
Reinvestment opportunities for capital in the business
o
Quality, ownership stake, and shareholder-orientation of management
o
Ability to bear pain, both the company’s and my ownMunger’s “Four Filters”
Understand the business
Sustainable competitive advantages (aka, favorable long-term economics)
Able and trustworthy management
Price that affords a margin of safety (aka, a sensible purchase price)
2
 
Pause Points in the Process
 Always think in terms of Process + Patience
 How big is the margin of safety? How reliable is it? Why? Pause #1
Are the business and its securities able to be understood and valued?
o
Avoid loss by
 Pause #2
Go back through all financial disclosure looking for information and context missed thefirst time
o
Patterns/trends
Level and quality of disclosure
o
Specifics (see next section)
 Pause #3 – final checks
What can go wrong? Do a “pre-mortem”
How can capital be permanently impaired by this investment?
What are the probabilities? Are the odds heavily in my favor?
What is the time horizon?
How attractive is the opportunity? Namely, how attractive is compared to my best currentinvestment?
Munger’s “two-track analysis”
First, lay out and deeply understand the rational factors that govern the situation under consideration
Second, focus attention on psychological missteps – either your own or those of other investors
“The Most Important Things”
o
Margin of safety
o
Balance sheet
Capital structure and liquidity
Asset value
o
Cash flow
Realistic and reliable owner’s earnings (especially a few years from now)
Can cash be reinvested at attractive compound rates?
How has management allocated capital?
Initial ideas to consider in the process1.Separate the business from the balance sheet
How is the business capitalized? Is it sustainable? Is it relatively efficient/optimal?
What are the assets worth? Liquidation value and reproduction value
Are there any “hidden” assets or liabilities?
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