12/20/2020 michael shearn: A checklist for investing success from a money manager Warren Buffett admires - The Economic

- The Economic Times

English Edition | 20 December, 2020, 07:19 PM IST | E-Paper

A checklist for investing success from a money

manager Warren Bu ett admires
Synopsis
Michael Shearn is the Managing Partner of the Time Value of Money Fund based in Austin, Texas, and author of a critically acclaimed book
The Investment Checklist: The Art of In-Depth Research.

ETtech
Michael Shearn may not be one of the most popular investing legends, but he counts
investing greats likes arren Bu ett, Charlie Munger and several top hedge fund managers
among the admirers and followers of his money management skills and research prowess.

Shearn is the Managing Partner of the Time Value of Money Fund based in Austin, Texas, and
author of a critically acclaimed book The Investment Checklist: The Art of In-Depth
Research.

In his book, Shearn advises investors to develop an in-depth research process, from generating and researching
investment ideas to assessing the quality of a business and its management team.

He further listed out methods to implement a principled investing strategy by maintaining a few checklists.

How to avoid costly investment mistakes

Shearn says investors make the mistake of buying or selling stocks too quickly, and then get caught up in the web of stock
price swings and third party market chatter, leading to costly investment mistakes.

He feels investors base purchase decisions on isolated facts and do not take the time to thoroughly understand the
businesses they are buying.

This often clouds their judgement and they start taking decisions that are in uenced by their emotions. Shearn says
investors should follow a thorough and comprehensive research process to understand the value of a business before
making an investment decision.

He says this process can be Read before you

made simpler invest.
through theInsights on RBL Bank.checklists,
use of straightforward Explore Now
which can allow investors to
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12/20/2020 michael shearn: A checklist for investing success from a money manager Warren Buffett admires - The Economic Times

identify quality investment opportunities.

Shearn says in his early days when he started out as an investor, his emotions always got the better of him. He used to
panic when a company put out a negative news release or the stock price dropped.

He realised this was because he didn’t understand enough about the businesses that he was investing which is why he
wasn’t in a position to interpret the news events as they came out.

To counter these negative reactions, he came up with a checklist comprising a series of questions that he answered
himself to increase his knowledge about a business.

This checklist put him in a better position to understand how to interpret news events and understand more about a
company.

hy a good investment checklist is a must

Shearn believes an essential part of good in-depth research is a good investment checklist. No matter how experienced
an investor is, s/he tends to always bene t from having a checklist which can ensure that both positive and negative
aspects of the market situation are covered.

He says a well-crafted checklist can make investors focus on the few key aspects of the investment and bring forth the
issues that they don’t have answers to, and which can be of huge value in the long run.

Shearn says a checklist can help long-term investors understand the business they own without which they will lack
conviction and risk selling due to market volatility, potentially missing out on the long-term gains.

“These checklists will help you consider a fuller range of possibilities in your investment strategy, enhance your ability to
value your investment by giving you a holistic view of the business and each of its moving parts, and identify the risks
you are taking," he said in an interview.

Shearn also feels investment checklists and diligent research, too, are lled with some pitfalls.

One obvious trap investors often fall into is getting entangled into endless research data points that are irrelevant to the
investment theme.

Filters to shortlist investment ideas

Shearn says having the right lters is one of the most important things in an investment process. Filtering investment
ideas based on types of businesses and management teams can help shortlist the right kind of businesses to invest in.

“When ltering through many investment opportunities the stock market o ers at any given time, it is important to
establish a criteria for the types of businesses and management teams one is looking for. Such criteria serve as a lter,
and thus you don’t have to review thousands of investment opportunities and can reject investment ideas quickly... Your
criteria can be as simple as looking for a simpli ed business with a large market opportunity, managed by a great
management team, and trading at a low price. You can also set criteria of what you do not want to invest in. For example,
you may want to avoid businesses that have high dependency on commodity resources, such as exploration and
production (E&P) businesses, because oil prices are di icult to forecast. By articulating and following strict criteria, you
can put the odds of making a successful investment in your favour,” says he.

How to understand value of an investment

Read before you invest. Insights on RBL Bank. Explore Now
Shearn says the purpose of investing should be to understand the value of what investors are buying, because if they
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12/20/2020 michael shearn: A checklist for investing success from a money manager Warren Buffett admires - The Economic Times

understand its value, they will know when to buy, when to sell and when to hold.

Shearn says in order to value a business, one needs to know something about the stability of earnings, and more
importantly, how those can change in the future.

“You’ve got to ask questions about the company in order to understand and be able to answer whether it’s stable earnings
and how they’re going to change. What kind of sales it makes, is it a recurring revenue or is it one-time sale, what are the
future growth opportunities are the questions one need to ask. As you go through these questions, you’re actually
learning that valuation is actually quite dynamic. It’s not static. It changes. For example, depending on the type of
business, if you change a management team, it’s going to have a profound e ect on the future earnings of the business,"
he says.

Shearn says an investment is most valuable when the business is building its competitive advantage, and not after it
already has one over other peers.

“In the past I would spend much time trying to determine if a business had a competitive advantage. Over time, I started
learning that actually most value in a stock or an investment comes from the advantage it is building as a business, not
after it already has one,” he says.

Shearn also lists out some tips for investors to follow in order to be able to achieve success in investing.

Be disciplined: In order to achieve success in investing, it is essential for investors to remain disciplined and keep a log
of the mistakes they make and go through them from time to time to maintain their focus, and not repeat those.

"As my career progressed, I have kept a log of mistakes made, why I made them and what I can do to not repeat them.
This has allowed me to be increasingly e icient and focused," he says.

Keep emotions in check: It is important for investors to keep their emotions in check and not let them in uence their
investment decisions.

“When managing investments, you must keep your emotions in check and allow logic and rationale to guide your
decisions," he says.

Shearn says envy is the worst human emotion, as it can distract one from focusing on things that matter. "Envy can cause
resources to be allocated in less than productive manners and causes people to do things that aren’t who they truly are.
As such, you have to be authentic to yourself," he says.

Be passionate: Investors should focus on things that they are passionate about as it helps to block out envy. “Passion is
the fuel for tenacity which allows us to push through obstacles and succeed," says he.

Pick companies with honest management: Before investing, investors should check whether the management has
sincere integrity towards the company and all its stakeholders.

Shearn feels this can be an indication of the true character of the management, as it gets revealed only when it is
challenged by di icult circumstances. He said a company that makes sure customers, suppliers and employees are all
happy does really well in the long run. Shearn says creating value for shareholders is not about maximising rate of return,
but rather providing value to all stakeholders.

Read before you invest. Insights on RBL Bank. Explore Now

Always remember the value of time and money: Investors should use their time wisely, as it is a nite resource that is
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12/20/2020 michael shearn: A checklist for investing success from a money manager Warren Buffett admires - The Economic Times

never replenished. He emphasises that investors should use their time well, and utilize their nancial resources wisely.
“Money does not buy us happiness, but rather o ers nancial exibility and freedom,” says he.

(Disclaimer: This article is based on various speeches of Michael Shearn)

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