Investing can feel overwhelming, especially for beginners trying to make sense of the complexities of markets and strategies. But having a structured approach can make all the difference. Inspired by Pulak Prasad’s insightful book, What I Learned About Investing from Darwin, I have in this blogpost tried to provide a step-by-step investment checklist to help you invest wisely.
The author of this book is Pulak Prasad, the founder of ‘Nalanda Capital’, a Singapore-based asset management company that manages over $5 billion of funds and mostly invests in listed Indian firms.
Prasad’s book provides insight into his investment philosophy and the art of in-depth research. It would be an understatement to suggest that his investment strategy is strict. He underlines that ‘We should be permanent holders of high-quality firms’.
As per this, the investment technique consists of three consecutive steps:
Using the concepts discussed in this book as a base, I have tried to write-down an Investment Checklist, that we can try to follow as a comprehensive checklist before buying a stock. We will look into these in this blogpost below.
1. Avoiding big risks:
Avoid firms with questionable promoters – Avoid any business owned or operated by someone who defrauds consumers, suppliers, workers, or shareholders.
Avoid turnarounds – According to Pulak, the chances of a failed firm making a successful turnaround are low. So, the author advises us to keep these sorts of stocks off our radar.
Debt Detox – Concentrate on debt-free businesses to prevent financial stress during difficult times. The author is very strong in his book, stating that debt-laden companies are a clear “No-No”.
Ignore M&A enthusiasts – Be wary of corporations that constantly participate in mergers and acquisitions. This is not just the voice of Pulak Prasad in his book. Even Aswath Damodaran, a famous valuation expert, also advises to avoid companies that overly involve in mergers and acquisitions. He goes on by saying that if the words “merger” and “acquisition” is repeated frequently in a company’s annual report, then try to avoid that company from your fundamental investment checklist.
Avoid expecting unpredictable outcomes – Invest in stable, predictable sectors rather than rapidly changing ones.
Avoid inconsistent owners – Stay clear from companies controlled by the government, MNC subsidiaries, or conglomerates, as the emphasis on value creation may be diminished.
2. Buy high quality businesses at a fair price:
Focus on high-ROCE firms – Look for companies that have consistently achieved high ROCE (Return on Capital Employed – a metric used for comparing profitability levels across companies in terms of capital – “EBIT by Capital Employed”). It typically means that their management team is exceptional, and they deploy money efficiently, such that they have a significant competitive edge over their counterparts, and that there is space for innovation and growth.
Seek integrated trends – There are distinct patterns in the success and failure of businesses. Seek out success patterns in older, more stable businesses while avoiding younger, more uncertain ones. Industries approach toward similar fates once winners and losers have been (basically) determined and the rate of change has slowed.
Avoid the noise – Ignore cheaply produced signals like as press announcements, earnings forecasts, and interviews in favour of valuable signals such as prior performance and their implications on the fate of the company going forward. Prasad believes that the past financial information shall give all the necessary signals for us to arrive at an investment decision. The author strongly believes that we cannot predict a future of a company, as he strongly says that not even the company management can predict their future earnings forecast (at least the next 12 month’s forecast) accurately.
Ensure company robustness – A firm must be resilient in order to stay afloat in a dynamic external environment, sustain internal tactical and organizational disruptions, and adapt through judicious risk-taking. The author focuses on what has already occurred rather than what will happen in the future periods to come.
The book discusses some of the main points of a stock picking checklist for business strength and robustness. The list below is not full, but it will give us a sense of preparation before investing in stocks:
- Delivered consistent high ROCE over a 10-year period.
- The company has a diverse client base and does not rely heavily on a small number of consumers.
- Has not seen operational losses throughout much of its history.
- The company has no or minimum debt and should have extra cash on its balance sheet.
- They ought to have established strong barriers to competition, or what Warren Buffett refers to as “economic moats.”
- Depends on a diverse supplier base rather than a small number of suppliers.
- The management team is steady with little turnover.
- Industry in which the company that we are investing-in should be slow to change.
The key part of the book is on valuation, and hence we will discuss that in a bit detail here.
Valuation is crucial:
A business’s current strength does not guarantee its future strength. Being price-conscious is the only way to keep a firm from losing its resilience. Do not invest until the market provides a favourable value, which occurs infrequently. So be price-sensitive. Only buy when the market provides excellent bargain valuation, which occurs infrequently.
In the book, Prasad states that he will pay a PE multiple equal to or lower than the market for an extraordinary organization with strong ROCE, a broad moat, and very little financial risk. He will occasionally pay a trailing multiple in the high teens or low 20s for a genuinely typical business, but these are rare occurrences.
The author recommends that we adjust our investment strategy for cyclical firms and those that have not showed consistent profits growth (e.g., flat for the last five years or quadrupled in the last year). However, the main concept is that we must give a reasonable assessment based on past, furnished financial data. Check out this article written by me to know the stock market valuation story.
3. We have to be very lazy when it comes to investing:
Buy very rare, hold very long, and rarely sell – Take advantage of short-term swings to purchase at good prices while holding for the long term.
Sell only if the company’s fundamentals have deteriorated significantly or if management commits a serious capital allocation error. The author mentions proudly in the book that he never sells an investment in the short term, and he invests in businesses for eternal holding. His average holding period is more than 20 years.
Ignore short-term volatility – High-quality firms appear to shift dramatically when assessed over days, weeks, or months, but they are far more stable when examined over years or decades.
Final words:
A comprehensive investment checklist for beginners includes learning the foundations of investing, establishing a sound financial basis, carefully selecting investment instruments, maintaining and diversifying a portfolio, and remaining informed. Beginner investors may better navigate the investment world and achieve their financial objectives by focusing on these important areas discussed in this blog.
As seen above, this book is a must read for all those who would like to know the best available investment checklist for buying stocks. This fundamental investment checklist, along with disciplined investing will take you multiple steps ahead of your peers in the wealth creation journey.
After reading this book, I am also trying to become a “Checklist investor”.
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