Last Updated on March 6, 2021 by Oddmund Groette
It’s weird how a little tick on a notepad, or even just in your head, can give you assurance and better results without even increasing efficiency or quality. Or the least, it may just contribute to your peace of mind. Well, checklists do have that sort of effect on an individual. Especially for an investor.
An investor in itself already has a thousand things to consider while looking at any investment. It might look like an easy matter of trade and gaining profits, but it does require a well sought out strategy and analysis. It’s no joke when it comes to checklists, especially when you hear that a business tycoon and investor like Warren Buffet has a checklist, even if it’s only in his head.
A checklist makes you avoid unforced errors, improves your outcome without any increase in skills, and saves you time in the investment process.
A checklist is a concept famously introduced by the airline industry with an intention to avoid accidents. It is basically a tool that aids to deliver easement and management in a job to avoid failures. A human mind is limited to a certain level of focus and memory. So a checklist delivers smooth and complete results over a task.
A checklist can vary based on the task it is meant for. It can range from a menial mental note for picking up your keys and wallet before leaving for work to a full-blown schedule in advance to carry out a task at a particular time and order.
Some of the more advanced use of a checklist involves industries like aviation for safety measures and preflight checks. Investors also develop a checklist as a significant part of their investment strategy. Industries like software engineering, healthcare, civil litigation, professional driving, etc. also include checklists as a critical part of their jobs.
Checklists in almost all their applications make up for the drawbacks that come with the incompetencies of human memory. Apart from being used to avoid fatal mistakes and accidents in industries like aviation and sports like racing, checklists also offer long term benefits by aiding in management and increasing efficiency in a task.
There is a good reason why the aviation industry is preferred for its high use of checklists for basically any task from flight checks to a pilot addressing extensive checklists for performing engine checks while taking off and landing. It typically has become a mandatory protocol to follow through the checklists for anyone in this sector.
The reason behind the need for such extensive use of a checklist is simply to avoid any scope of mistake when facing complex tasks or the ones that are repetitive in nature. Humans have a basic nature of forgetting or skipping through steps causing mistakes that may have grave consequences. As the tasks get complicated or increase in number so does the need for a checklist.
Our brains in time develop the tendency of finding shortcuts and give into hasty decisions. However, when it comes to investing and trading, a well-thought analysis is a crucial part of developing a strategy and checklists are a great tool in accomplishing this goal. Every investor should develop a checklist while analyzing a stock or company. It is part of growing as a successful investor to put off error out of haste while investing.
As much as it is natural to understand checklists role play in avoiding disastrous mistakes, they also contribute to saving time. Apart from the easement and pocketing time by simply ticking on your list, checklists eliminate the time wasted while recalling or rechecking due to lack of assurance.
Especially for an investor, it gives them an edge to deciding which investment is worthy or not. A lot of investors waste time in going through heaving, reading, running numbers, analyzing tons of data, and then critically thinking over the conclusion before they come to a final decision. That is practically a tedious, sometimes boring, and time-consuming method.
Once an investor sets their remarks on the basis of a checklist, it heavily adds efficiency and time effectiveness to the overall process. An effective checklist makes it easy for an investor to quickly and easily determine which company to invest in.
It is famously said that If you have a useful checklist, you actually improve your outcome without any increase in skills.
Before going into understanding the concept, the circle of competence is pretty much a part of your checklist and early part at that, specifically in investing. The concept is quite old and religiously followed by many investors. It was popularised by Warren Buffet through his Berkshire Hathaway letter to shareholders.
The concept quickly caught wind, and the question came- what is the circle of competence and why is it important in investing.
In layman’s terms, this concept advises that one should only invest in businesses that they properly understand. The concept targets a very simple question- can you do something that you know nothing about? And even if you do, the risk of making costly mistakes becomes extremely high as compared to when you actually know what you are doing.
For instance, the owner of a restaurant would hold significant knowledge about the restaurant’s economy including the workings of its business model, how to expand the restaurant with the required capital, revenue generation process and time, etc. So since this owner has extensive knowledge of this business, he would definitely have a better chance of succeeding if he goes in to invest in other restaurant chains or businesses like Dominos, Pizza Hut, Taco Bell, etc. instead of heading towards IT industries that he probably knows nothing about.
Along with helping an investor avoid mistakes and make quick & efficient decisions, the circle of competence also contributes to narrowing down the selection of stock while looking into the stock market. Since there are thousands of stocks listed on US exchanges and markets like the Indian stock market, it becomes completely impossible to analyze and understand all of them. It is a smart decision to go with your competence when choosing and investing in a stock.
Checklists may be simple to understand but deliver great results in terms of efficiency, precision, and easement, especially under complex situations. Good checklists are known to deliver crisp outcomes. They act as reminders of those steps that are important and don’t necessarily need to detail everything out. A bad checklist, however, can be longer than it needs to be, unclear, difficult to use, imprecise, and detailed.