RTN Investments Blog

Thoughts on Investing, Economics, Current Events, and Anything Else I Want to Ramble About

A Checklist Approach to Investing


It was the fall of 1935 at Wright Field in Dayton, Ohio.  Boeing, a young, struggling airplane builder was in a competition to test their prototype B-17, known as the model 299, in order to win a contract from the Air Corps.  The plane was known as the “flying fortress.”  It was a massive four-engine bomber with machine guns mounted everywhere.  On October 30th, 1935, the plane took off in a test demonstration for the military.  The plane accelerated down the runway and took off.  As it was climbing it suddenly stalled and proceeded to crash and burn.  Both pilots were sadly killed.  The pilots had failed to disengage a safety device known as the “gust locks” that prevented parts from being damaged by the wind while parked.

Boeing had lost its only Model 299 and lost the competition for the military contract.  The company was seemingly doomed.

As Boeing engineers investigated, they realized the Model 299 was simply too complex of an airplane to fly from a pilot’s memory.  From this, the aviation checklist was born.

Boeing went on to rebuilt the plane and demonstrate it successfully, saving the company.  Ultimately, 12,000 of these “flying fortresses” were used by the US in World War II.

The crash rates due to pilot error went down to nearly zero.  Checklists were introduced for:  taking off, flying, landing, and after-landing.

Strict checklists are used to this day by airlines.

Atul Gawande, author of the Checklist Manifesto, devised a checklist for surgical teams in eight hospitals.  The average amount of complications decreased by 36% and deaths were almost cut by half.  (https://hbr.org/2010/01/using-checklists-to-prevent-fa)

Gawande argues that checklists should be used not for every item that needs to be done, but only for the few essential “no-brainer” tasks without which can result in tragic consequences.

Checklists clearly save lives.  But can they save our investment lives as well?

Checklists in Investing

If checklists are so widely used to ensure tragic mistakes don’t occur, why aren’t checklists an essential part of making business decisions and investing?

In an interview with Graham and Doddsville, investor Mohnish Pabrai said about investing:

The thing that I found very strange was how you can have an entire industry which does not function with a solid framework. To me, it is like people doing brain surgery by just ‘winging it’.

Pabrai mentions how his checklist for analyzing stock in a company gives him a competitive advantage and that he has about 97 questions to run through before committing capital.  He notes that he built his checklist from analyzing the mistakes of Warren Buffett.  Although he says not each stock will pass all criteria, he makes sure that he understands the risks and potential traps.  The key being to minimize the risk of a permanent loss of capital.

Apparently, Mohnish’s checklist has worked fantastically for him.  He says:

Since I put the checklist in place, in 2008 till today, we have made I think more than 30 different investments in the last five years or so. We only have so far, we invested about $200 million. We’ve already exited a bunch of positions and we’ve exited with about $500 million on those positions, and we only lost money on two investments. And the total amount of money we lost from those two investments is less than 5 or 6 million dollars. And I think a large part of that is the checklist significantly brought down the error rate.

Here’s a presentation from Mohnish Pabrai to Columbia Business school where he stresses the importance of checklists and how he learns from the mistakes of great investors:


My Investment Checklist

While investing over the years, I’ve slowly built my checklist, building on past mistakes and learning from other investor’s mistakes.  I’m sure there’s questions still missing.  The checklist is still evolving but here’s what I have so far.  After picking a candidate for investment, I ask myself these questions before committing capital:

  1.  Do I understand this company?
  2.  Are there high returns on capital and equity?
  3.  Is it valued attractively based on various measures such as price to free cash flow, price to earnings, enterprise value to operating income and others.
  4.  Has there been consistent free cash flow over the years?
  5.  Has the company bought back its own stock over the years?
  6.  Has the company paid dividends over the years?  Or has it reinvested its earnings at high rates of return?
  7.  Does the company have low debt relative to equity?  Can a downturn cause leverage to be a problem?
  8.  Have revenue and operating income increased consistently over the years?
  9.  Are there high and consistent gross and operating margins?
  10.  Is management shareholder friendly and communicative?  Is the company founder-led?
  11.  Is this a cyclical company or does this business operate in a cyclical industry?
  12.  Is this a wide-moat company?  Is there lots of competition?
  13.  Am I comfortable holding this stock for at least two years?
  14.  Does the business have a long runway for growth?
  15.  Is this stock a potential long-term compounder or more of a value play?
  16.  Are the recent results of the business due to some type of temporary tailwind that will eventually cease?
  17.  Why do I think this stock is undervalued?  What are other investors missing or ignoring?

Well that’s my checklist and I’m glad to share.  Still building it but I think it covers most of the questions that could help investors prevent permanent losses of capital.  Hopefully this article demonstrated how vital checklists can be not only in aviation or surgery but in making investment decisions.


This article is not meant to be investment advice.  Do your own research before investing.

Robert Nowak is the founder of RTN Investments, LLC.  RTN is a registered investment advisory managing separate accounts for clients and is modeled after Warren Buffett’s original partnerships.  RTN’s goals are the preservation of client’s capital and to outperform the S&P 500 on a rolling 5 year basis by investing in undervalued stocks of high quality companies.