251- Checklist

[Music] Hey everybody, this is Phil Town. And this is Danielle Town. Welcome to the invested podcast where we are investing and learning to invest like Warren Buffett, Charlie Munger. You guys have heard this 250 times already. But I think you probably have a pretty good idea of what we do here. And we do get the occasional comment that we tend to drone on in the beginning about how we do what we do and why we're learning what we're learning and people have heard it a couple times. But I personally really enjoy the recap of. Well, I'll say it a new way today. Please. Not new, old new. There's nothing new under the sun. Particularly in an investing strategy that's 90 years old. Yeah. There's nothing new. But it doesn't hurt to repeat this. That what we're trying to do is buy $10 bills for $5. Oh, that's a new way. That is new. You've never said that before in the beginning. And we're trying to do that. I mean, first off, that sounds like that'd be fun. And then maybe one should explain why in a rational stock market with very, very knowledgeable people all over Wall Street and around the world, why would anybody sell a $10 bill for $5? Why would that happen? And the answer that we've gone through many times here is because of fear. Fear changing the way people think from, you know, ideally a long-term view of the world to a very short-term view of the world driven by what's going to happen in a very short period of time, quarter or half a year or a year. And that changes everything when you start to realize that's how the market's functioning. And that's what makes sense out of Ben Graham's long ago, who founded this way of investing, is long ago contention that, really, if you want to do well with investing, you simply sell when the markets are greedy and you buy when they're fearful and that the markets go through that fluctuation over and over again regularly in terms of recession, economic recession, or in terms of industry, cycles and so on. So basically you buy fear, you sell greed, and the result of that is going to not be that you buy low sell high necessarily, but that you are able to get a bargain. You're able to buy great companies when they're on sale if you do that. That's it. That's 90 years of stuff. How to buy $10 bills at $5? And the thing that we're trying to do here is to lay it out. Clearly, with all of the limitations of buy step in excruciating detail. So we've promised dad to do your very good idea that you suggested last episode, which fits perfectly into what we're about to say. Step by step in excruciating detail, because what we want to talk about are checklists. Checklists are the lifeblood. Is that the right analogy? The bones, maybe the skeleton of every good investor that I know of, because for so many reasons, but mostly because they help us stay rational when we become emotional. I hear you say that. I'm pretty sure nobody's ever seen Warren Buffett use a checklist or Charlie or Ben Graham for that matter. Well, to be sure people, no checklist. Charlie's talked about investing for years, no checklist, Buffett, no checklist. Oh, oh, I'm sure. We have a problem here. And that is that. The problem is that you are wrong. What? Certainly. I have here in front of me the, the Almanac. What's this thing called? Uncle Charlie's Almanac. Oh, sorry, four Charlie's Almanac. Right. Four Charles. The Witt and Wisdom of Charles team. One of the best bathroom books ever. Oh, it is the best, but you're right. It's the best bathroom book. Yeah. Because anytime I talk to anybody about this book, I think you guys are ginormous in physical size and very expensive on Amazon, but totally worth it. Also, I recommend you buy from independent bookstores, of course, but it's a bit hard to find. Because anytime I talk to somebody about this book, they go, well, you can't read that book from beginning to end. You just can't. I'm like, yeah, no, you can read like three pages at a time and like glean the wisdom. But it's not the kind of book that you read from beginning to end because it's all these short little vignettes from speeches and essays from people about Charlie Munger and and stuff. Warren Buffett has said about him and interviews with his children. It's very, very interesting, but it's not the kind of book you read from beginning to end, which I think also lends itself to its ginormous size because it's kind of encyclopedic in you sort of pick it up and it weighs a lot. It feels like you're about to open a tome. So when you said checklist, sad, of course, went to the almanac to see what Charlie said about checklist. And if you look up checklist in the index, which is what I did, there's a bunch of pages where they talk about checklist. So I'm just going to refer to one here. And I'm going to give an offer a checklist on if you have the third edition like I do on page 73, but on further reading or closer reading. It doesn't actually come from Charlie. It's just the author's guess as to what this is Kaufman's idea of the child. It is it is. But here's what I'm trying to see how I can read this and still talk into my microphone properly. All right. This is how the editor describes Charlie and checklist. Charlie, okay, at this point, so he's going through like what Charlie's looking for. This is from page 69 of the third edition. He says, at this point, only an exceptionally superior investment candidate will still be in the running. But Charlie does not immediately rush out and buy it. Knowing that a necessary companion to proper valuation is proper timing. He applies yet a finer screen, a prior to pulling the trigger checklist, which is especially useful in evaluating what he refers to as close calls. The checklist includes such items as what are current price, volume and treaty considerations, what disclosure timing or other sensitivities exist. Do contingent exit strategies exist? Are better uses of capital currently or potentially available? Is sufficient liquid capital currently on hand or must it be borrowed? What is the opportunity cost of that capital and so on? Now, end quote. Lord, this thing is a monster. I just, where is this from? This is. Where's what from? Okay, there's there's a on value walk, which is a fabulous website. Value walk, a guy named Shares Raza posted up in 2015. Charlie Munger's investment principles and checklists as a PDF. Okay. To throw gasoline on this file. All right. This PDF, the PDF is looks like it's in. It's not even, you know, like I think it's single spaced. It's like how many pages are there? Okay, get this. This is a checklist from this guy who says this is Charlie's checklist. The checklist is 148 pages long. Oh, come on. I am not making this up. It's 148 pages of checklists. Honestly, some of it, well, I'm looking at the bottom of it. It's got Sam Zell's stuff in it's got Jim Chano's on how to show it. Also, it's a big compilation of checklists. It's got everybody in here. Okay, fair enough. Focused investing. Oh, my lord. Okay. Tom Gainer. Oh, he's got Tom Gainer's four North stars of investing. Richard Chandler. I take it all back. This is just full of everybody's checklist. It might be fun to look at if you want to. Actually, that would be fun to look at. So I think here's the point. Charlie, you know, we don't have a source for those quotes. My one complaint about this book is that it really doesn't give you much sourcing. But other than that, I think we can assume that Charlie does have a checklist of some sort. Well, I think that's true. And that's why we're having this discussion is because of all the -- But you were just saying that Charlie Munger has never talked about having a checklist and probably doesn't. Buffett has never talked about having a checklist and probably doesn't. I'm not sure. I think that's what they do. Well, I think Charlie's talked about it in this sense. We've had his checklist on this podcast a hundred times, which is, okay, you better do these four things. Make sure you understand it. It's got a mode. You just got good management and you buy it on sale. So that's as close to a checklist as I've ever heard Charlie talk about. Yeah. And you know, that's a pretty -- to me, that's a good checklist because I can get my head around that a little bit. If you're talking about 170 pages of checklist, I'm not going to be able to do that. I'm not talking about that. Right. In fact, isn't that one of the principles of checklist? There's a book out there by a tall guwanda, a hope I'm saying his name, right? You think I've got the ballpark? Yep, that's right. And yeah, there's go ahead. But we put this in our book. Yeah, we've discussed it briefly, occasionally on the podcast, but it's a really good book. What's it called? Is it called? Complications. But there's another one that the one we quoted and invested was complications, but there's another one that's entirely about checklist. It's called the checklist manifesto. That's the one I'm talking about. The checklist manifesto manifesto, which I read. And he makes this really good point in it that airlines live and breathe on checklist. Pilots have checklists. But there's a very specific way you have to build a checklist. You have to build it so that you're hitting the real important things and not getting caught up in the junk. Because if you've got a problem and you pull out the checklist and you're flying Ethiopian airlines and you don't get to the problem quick enough, you're gone. You're gone. Yeah. Exactly. And if you're an investor and you're not going to die based on what you're going through on your checklist, but you maybe will never get to the end of the checklist because it's so long and therefore never take any action. That's also contrary to the goal here. The goal is to have a checkpoint against yourself, against your own memory to make sure you haven't forgotten anything and to make sure you actually answered the questions that you won't have asked before going into a particular investment. You want to, it's a safeguard. And if it's too long, it's not going to be useful. And if it's too short, it's not going to be useful. Like Charlie's four principles as a checklist. Yes. One one level very useful on the level of sort of checking to make sure you didn't forget anything important in the details. Not that useful in my opinion. It would be a little bit like an airline checklist that says, all right, first, make sure you know how to do the aircraft. Make sure you know how to fly it. Take off. Fly the plane. Land to the plane. Yes. Leave. Yeah. So that's like, oh, okay. But and in all fairness to Mr. Raza, who is probably going to hear about this, send me an email. He does read the very beginning of this massive pile of checklist. Say that good checklist. I'm quoting him now. Our precise, efficient, easy to use, even under difficult circumstances. Do not try to spell out everything and provide reminders of only the most critical and important steps. So the power of checklist is limited. Bad checklist or vague imprecise too long hard to use in practical and try to spell out every single step. So good. I agree. Good. I like that. Yeah, I do too. So what what what do we have for a checklist from Charlie? He's basically saying that Charlie's got a checklist that says get original source documents, right, and read them. And see. See. See. See. See. See. See. See. See. We're talking about Charlie Munger. He says. Oh, this is the PDF that you downloaded from the internet. Yeah. I'm just kind of skipping through it here. So basically read about it on the 10k's 10q's proxies. This this stuff we talk about it invested. And and then there's Munger's four filters. We just said, that was all right. And then he's saying pause points. So this is interesting. Pause points. And you see in this in in Munger's in the Omnit as well. No, it's completely different than what I just quoted. Yeah. I think he's making a lot of maybe he's just pulling this together. I don't know. I really looked at it that closely. But all right. So it ain't mine. It ain't my checklist. I'll tell you that much. Yeah. I think you know, everybody's got their own. And I think what we want to do here before we really get into the nitty gritty of like what could be on a checklist for investing is talk about whether or not we should even spend time on this. Like if we're about to spend time on this. Why? And I think we've so far said, okay, it's because it creates efficiencies. It keeps you from getting to emotional in times of stress. And it helps you remember the really important stuff without getting too far into the nitty gritty. And I agree with all of that. But I feel like so many of us sort of think, oh, I'll be fine. Oh, I won't need that. Well, I get to a place where I think you can get paralyzed by a checklist. I think you can get to where it's just too much. And I think Monash has over a hundred items on his checklist that he built by having an intern just dig through or he dug through every single one of Warren's letters and Charlie's letters and tried to fair it out those things that went wrong because they'll put in the letters the things that went wrong and what they did, you know, what they did wrong to have that problem occur. And then he built his he built his checklist out of that and his own negative experiences. Right. And so it's like everything bad that's ever happened. Let's try to guard against that. Right. And I guess you could just keep coming up with more stuff. But it gets into such detail that you stop looking at the checklist essentially is what happens. That's what happened to me in the past is that I've gotten so many things. I just don't want to pull it up. Well, and that's where you need to know that I self. Like if you're the kind of person who really isn't going to use that and isn't going to get into that nitty gritty level of detail, then it's useless. Then there's no point to it at all. It has to be practical. And if you're the kind of person who loves detail and, you know, needs that individual point after individual point to feel in control and like you haven't forgotten anything, then that's what you need. And I think checklists are so massively individual because of the response we each have to those sorts of expectations that it sets out. It's almost like a paper version of like outside expectations. You know, what kind of are you going to be able to answer correctly more rather than less? Or are you okay if you only know the answer to like three out of your 90 questions or is that going to make you feel like crap? And therefore you don't ever open it. You know, like you have to think about all these responses that you're going to have yourself and that really takes knowing yourself and your own practice of investing. So I've got an idea about how to go about this. It's actually worked for me. Okay. In terms of creating your own checklist, I find that if that kind of taking a page from the airlines is that you want the checklist to be short, but there's a lot of different checklist, right? You have a checklist for getting the points started. So here's start the aircraft checklist. Here's shut down the aircraft checklist, right? So you can have a book of checklists on a plain complex aircraft and yet the checklist themselves are pretty comprehensible because they're nested. They're they're essentially an outline form where you say, okay, what am I doing now? All right, what am I doing now is getting ready for takeoff. So let's go to the takeoff checklist and start going down it and indeed the copilot will read the eight items on the takeoff checklist. And that's pretty you can you can do that. Imagine if you did a checklist that had all of the checklists that are nested all on one page and just in a big streaming flow of checklists. It would just be a mess and you couldn't hardly figure out where you are on the page to begin with. So it's this concept of sort of saying, okay, what is it that we need to figure out first? And so with our what I've done is I've said, okay, one of the most important things to me is am I starting this research off on a good foot? Particularly if I'm a novice investor. Am I starting off on a really good foot? Am I standing on solid ground or am I standing on quicksand? Right? And since I'm a novice investor, let's say, it's difficult for me to know that. You're saying at the very beginning when you're starting to look at a company. First thing, right? And so I would say for me the first big, the first checklist would be how did I find this thing? Yeah. How does this come into me? Yeah. Right? We call that radar or whatever like we can make up a clever acronym. But the basic idea is how am I how do I find this company? Is this a company I work at? Is it a product I use? Right? So for example, some great investors have thought the best thing to do is just start focusing on products you already use as a as a beginning point. But one of my favorite beginning points in one that I can really, really recommend everybody is to start with something a good investor is already buying. Begin there. So your checklist could be how did I find this and have several items about where you you would look to find things. And if it's not one of those things, then maybe that's a bad place to start. - You mean like a multiple choice item on the checklist. - Right, is it this or this or this or this? Am I starting with one of these things? Or even better, maybe it's three things I have to have. It's gotta be something, a guru is buying, it's gotta be something that I feel I'm connected to in some way, right? I mean, they're passionate about this business or I'm working in it or I'm spending my money there. Maybe I've gotta have those two things, right? As a way of getting started. So it could be a very short checklist. It's like, okay, that and that, check, check. You're frowning. - Well, I just never thought of like the way that I find a company would have to meet certain criteria. It kind of strikes me as weird. Like I would just not be able to look at anything that just came to me in an interesting way. - I don't know if that's a interesting thought. If you're starting off as an investor and you're looking at things that come to you in interesting ways, what does that mean? Does it mean that you are always starting kind of from quicksand, potentially? Like you don't know what you're getting into when you start. - I don't know because what bothers me about that is that it causes you to immediately reject companies without ever even starting to see if you can understand them. And a really important part of my beginning practice was really feeling the tension between what I can understand and what I can understand. And the way that I did that is I just read a lot about a lot of different companies. And I didn't reject the ones that I discovered in the Wall Street Journal, just because I didn't know if anybody else was buying them or anything like that. - Right. - But was there something that attracted you to it that made it different than when you weren't attracted to? I mean, or you're attracted to everything. Is there no discrimination whatsoever? - There's no discrimination. No, of course it's stuff that just, that either I'm, it's, I mean, it's basically what you just said. It's either like I have personal experience with it or I would like to. (laughs) One thing that I always think about is this one day where I started reading about the dairy industry in Canada because they have a whole cartel and it's like all protected and it's really, really interesting and different than the US. And there was an article I think in the Guardian about it. And I was just fascinated by the milk industry in Canada and what that could teach me about the dairy industry in the US because I'm interested in food and organic milk and how those organic eggs and how those things can be done humanely. And it was just like the best day. I loved learning about the dairy industry in Canada. So it was clear to me that I would not be able to understand it well enough to invest in it or in a Canadian company dealing with milk there. But learning about it was really informative and really fun. And so the way that I wrote it down and I think for me it's been really important to write down stuff that I reject. So the way that I wrote it down was like founded in a Guardian article, full stop. And you were attracted to it. And I think that's fine. For whatever reason. Yeah. Right? So a checklist might be something that has that on it. It says, okay, I'm attracted to this for whatever reason. That's gotta be there. I mean, maybe it's completely topological too. Of course, I wouldn't be looking at it. But I think we're-- As a starting point, that's not the ending point of the checklist though. I mean, what if we were talking like getting started on this and not having years of experience, wouldn't it make sense to put something on the how my coming about really decided to dig into this? Part of the checklist, to me, I mean, it would just be so strong to put on there, there's gotta be something. Somebody I admire who's currently buying into this. Sure. And I mean, I'm just pushing that forward as a, you guys don't have to believe me or do it my way. But the reason I'm saying that is because, you know, obviously cloning a good investor is the way most of us started and as investors, we didn't go out there and just start doing this on our own. I mean, even really super smart people like Buffett and Pobry have made very public statements, Charlie Munger, very public. If you wanna do this, just clone somebody. Don't make it-- Totally. So hard that you're inventing the wheel. Totally. And the reason I'm thinking that might be a good place for a checklist, not that we're building one here, but just as a general idea about these things is that you can spend an enormous amount of time just learning about the world in lots of ways by looking at companies that you think might be interested. And at the end of the day, my gut feeling is that if you're not an experienced investor, you're not gonna have the confidence to put 10% of your retirement account into this company that you figured out all on your own. And no one else that you know of is buying it. You just did it yourself and somehow-- Maybe, or you know, as you mentioned also, or you know a lot about it from some other way. You work there, or you know somebody who works there, or you grew up in that industry or whatever. We're gonna have to have an ego that's so strong. (laughing) You're gonna wake up and go, oh, I'm scared to death here. But I feel that we're veering from checklist, which is agnostic. We're trying to actually build the checklist right. Prescriptive. Prescriptive. And-- It's not where we wanna be. Checklist is not prescriptive. I think that's incredibly important. It has to be, I can't-- What's prescriptive mean? Prescriptive meaning telling you what you should do. And you think a checklist isn't that way. I don't, no. I think it doesn't limit you. An airline checklist saying, do these things, isn't that completely prescriptive? Yeah, you're right, that is completely prescriptive. Well, maybe I'm totally wrong. Maybe a checklist shouldn't be agnostic. Okay, so let's take the view that a checklist should tell you what to do, and guide you on the right path. Yeah, do these things. Do these things. Right. Hmm. Do these things. So for example, and I think there's a point of view that that is descriptive, rather than prescriptive, where you really just are-- And maybe it's just me, but I think by writing. And so I have spaces on my checklist for me to just write stuff. Fill in the blank. Yeah. Maybe that's not a real checklist. Well, I think that that's useful. I mean, let's say one-- It's useful, but maybe it's not a real checklist. Yeah, okay, and that's what comes from the checklist. Yeah, maybe so. Okay, so this is what we need to get into. And this is what I want to talk about with our checklist series is, is how do we really build incredibly strong checklist, not anything else? And maybe the way I think about my checklist needs to be refined, probably. Let's be real, probably. And let's do this. I mean, we've got this wonderful list of things here. Okay, go to Value Walk, or Google Value Walk Charlie Munger's Investment Principles and Checklists. And what will come up is Sheree's Raza. Shira-- sorry, I'm killing your name, man, I'm sorry. Shira's Raza, December 22, 2015. Charlie Munger's Investment Principles and Checklists. And of course, I'm talking about it without even looking at it. And suddenly I realize that the Charlie Munger part of this is about done at page 10. (laughs) Out of a gigantic pile of stuff that includes, are you ready for this? This is amazing. Howard Marx, who's fabulous, Phil Fisher, Keane's Graham, Greenblatt, who's fantastic, Ray Dalio, Chandler, Tom Gainer, we've watched Tom's talk at Berkshire. Lou Simpson, Don Quillo, Jim Chanos, who's a short guy, short seller, author Schloss. All right, so let's download-- Bill Ruin, which I haven't looked at it yet. Let's download, let's read it. Let's come back next time and talk about-- And prepare to discuss what should be on, and I hate to say should, because as I started out, everybody's is gonna be different. But maybe we talk more about the elements of a really robust checklist. - We may find some things everybody's got in common here. - We may. - And that might be good for all of us. - And I already have already started thinking about mine and how I can be changing it. I'm loving this. - Yeah, this could be good. - All right, all right. - All right, I'm there. - Thanks everybody. - Got to go play. - Bye. - Bye. - Hi guys, thanks for listening to "Investing." you and your friends. enjoyed this episode and you want more information, including show notes and more episodes, visit us at InvestedPodcast.com. There's a special offer waiting for a podcast listeners to attend my three-day Investing Workshop. Absolutely free. So just head to InvestedPodcast.com. Everything discussed on this podcast is either my opinion or Danielle's opinion and is not to be taken as investing advice because I am not your investment advisor, nor have I considered your personal situation as your fight to do sharing. This podcast is for your entertainment and education only and I hope you enjoyed it.