10 Ways to Improve Your Investment Process – #4. Use Checklists

The fourth idea to improve your investment process is to use checklists. Charlie Munger has been talking about checklists for years and they recently got a big plug from Atul Gawande’s book The Checklist Manifesto.

Checklists are still massively underutilized, in spite of being one the best performance levers out there.

You should use checklists because they work. Consider the following.

In 1935, Boeing nearly lost a major contract for the B-17 when it crashed during a demo to the Army. Boeing determined that the crash was the result of human error. The B-17 was much more complicated than prior planes. To fix the problem, Boeing came up with a simple checklist. The B-17 went on to fly almost 2 million miles without an accident and the Army bought almost 13,000 planes.

Checklists played a role in the successful landing of US Airways flight 1549 on the Hudson River in 2009. Captain Sully Sullenberger and his co-pilot Jeffrey Skiles followed a series of checklists to try to restart the engines and then ditching procedures to land the plane on the icy river.

They used checklists to stay on task in a moment of massive stress. The checklists didn’t substitute for judgment, but greatly lessened the chance of making a dumb and potentially lethal mistake.

Checklists have also had an unexpected impact in medicine. A simple 4-point checklist was rolled out to Michigan Intensive Care Units to reduce infections from line insertions. Line infections continue to kill thousands of people each year.

The results were dramatic. The typical I.C.U. cut its quarterly infection rate to zero. Fifteen hundred lives were saved and costs were reduced by a hundred and seventy-five million dollars.

Checklists also work in finance. One study looked at the use of checklists by 51 venture capitalists – a group that’s both intelligent and highly motivated to succeed. The VCs said one of their biggest challenges was deciding which entrepreneurs to fund. They found that the jockey was often more important that the idea itself.

The study identified a half-a-dozen different ways that the VCs used to decide who to back. Some went by gut feel. Another relied on extensive interviews. One group used a checklist. This group ended up firing only 10% of entrepreneurs vs. 50% for the other groups. The average return in the checklist group was 80% vs. 35% for the others.

Hedge fund manager Guy Spier talks about how checklists counter what he calls “cocaine brain” which is the feeling of euphoria that can cloud your judgment when you get excited about a stock. A checklist brings you back to earth and prevents stupid mistakes.

Another hedge fund manager in The Checklist Manifesto uses checklists to both drive performance and reduce the time it takes to evaluate a security. This was a surprise because his analysts thought checklists would slow them down.

We can summarize some of the things checklists do.

They are not a substitute for judgment, but they do aid our memory and help us to manage complexity. They help us to manage our emotions and misjudgments. They also help reduce the effects of complacency. Instead of thinking – “Why bother reading the proxy and footnotes? Most of the time there’s not much in them.” – you go through them because it’s on your list and part of your discipline.

In short, checklists help us to prevent mistakes.

So why aren’t they used more often? I think the answer lies in human nature. We all know that diet and exercise are good for us. The problem is often not with knowing what to do, but actually doing it.

I also believe there is some resistance to checklists on the basis of pride. It can be difficult for a highly trained expert to acknowledge that a simple checklist can improve his or her performance.

Checklists are also a useful way to store wisdom and make it accessible. When you come across a good idea to improve your investment process, where do you put it? If you’ve recorded your process in checklists, you can simply add it to the appropriate one. You can even have a “someday” checklist for ideas you want to think about before making them part of your process.

The use of checklists will improve your investing process and in turn improve your results.

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4 thoughts on “10 Ways to Improve Your Investment Process – #4. Use Checklists

    1. Greg Speicher Post author

      Shlomi, a checklist is simply a list of things to think about when making a decision or performing a task. This series of blogs is not about the specific content that a checklist should contain. That will vary from investor to investor depending on the strategy being used. You can use checklists to capture criteria that are important to you and then they will be available to you when evaluating a possible investment.

      Reply
  1. vinvestor2010

    Greg, the publication “Investing for Higher After Tax Returns” by Tweedy Browne has a Buffett 101 checklist on Page 69.This contains 38 useful points.
    Not great but a useful start for building one’s own checklist.
    By the way thanks for keeping an absolutely brilliant website.

    Reply
    1. Greg Speicher Post author

      vinvestor2010, thanks for the Tweedy Browne reference. Looks like a good checklist. Thanks also for the comment about the blog. The positive feedback means alot.

      Reply

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