13. A checklist, because memory is a biased analyst

Part 17 of 19 in The Patient Owner: Charlie Munger’s Ideas, as Rakesh Jhunjhunwala Might Have Taught Them to an Indian Investor← Part 16Part 18 →

This chapter discusses the importance of using a checklist for investment decisions, inspired by Charlie Munger's approach. It provides a detailed checklist to help investors make more thoughtful and unbiased decisions.

Aniruddha. Munger loved checklists for the same reason pilots and surgeons love them. Not because we are stupid. Because we are busy, status-conscious, and sure we have done this before. Will you leave me one I can print?

Rakesh. Print it. Do not laminate it. A laminated checklist becomes a relic. A pencil checklist becomes a habit. Before any cheque — listed share or angel round — answer in ink. A blank is a no.

The patient owner’s checklist

Circle. Can I explain how this business collects cash, in one sentence, to a sceptical friend who is not in the market? Have I seen this kind of business break, or am I sightseeing?

Inversion. What are three concrete ways it dies in five years? What fact would I see first? Have I written that fact down where I cannot edit it later?

Incentive. How are the people paid? What is pledged? Who is the related party, and would I accept those terms from a stranger? Who gets paid if I decide this week?

Moat. What does the customer lose by leaving? If the answer is ‘nothing, but the app is delightful’, I do not have a moat. I have a feature.

Numbers against a bad year. If growth is ordinary and the market is bored, is the price still sane? Does the balance sheet survive a closed window?

Base rate. How have businesses of this type, in India, actually ended? Am I claiming this one is exempt? Why, in a sentence that is not from the deck?

Psychology. Which tendencies are in the room — liking, authority, a deadline, a cousin, a falling price that makes a dear price look kind? Have I named them?

Opportunity cost. What am I not buying, or not doing, in order to do this? Is this inside the few, or am I diluting the few to feel busy?

Sitting. If I were forbidden to sell for five years, would I be relieved or horrified? If horrified, it is a trade, and trades need a different, shorter checklist and a pre-written exit.

The machine, if used. Did it read the footnotes or the fantasy? Did I force it to disagree? Can I defend the note with the screen shut?

Character. If the next news is bad, do I trust these people to say it early? If I am hoping to be lucky with people, I am hoping, not investing.

Aniruddha. I would add one from the ward. What is the base rate of the person advising me? A banker paid to list, a friend paid in status, a model paid in my engagement. Advice has a chart too.

Rakesh. Add it. And add this at the bottom, in larger letters: if I need the price to go up soon in order to feel clever at dinner, I am not yet an owner. I am an audience. Audiences pay.

Evening question. Run the checklist on something you already own. Count the blanks. The number of blanks is the true position size, whatever the contract note says.