Two-step checklist aids investors
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EMIL LEE
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PostPosted: Mon, Apr 24 2006, 11:34 am EDT    Post subject: Two-step checklist aids investors Reply with quote

Two-step checklist aids investors
Focus on returns and expectations
BY EMIL LEE
Morningstar.com

Charlie Munger, Warren Buffett's intellectual and investing partner at Berkshire Hathaway, loves checklists. He marvels at the sensibility of veteran pilots, who despite having flown thousands of flights, still use preflight checklists each and every time they fly. After all, why wouldn't you use a checklist? It only takes a minute and could prevent fatal mistakes.

At Morningstar, we make no apologies for our attempts to emulate great value investors like Munger and Buffett. We think investors would be well served by running through this simple two-part "pre-investing" checklist before walking down the aisle with their next stock investment.

1. Are high returns on invested capital consistent/sustainable?

Buffett once remarked that if he were a basketball coach, he wouldn't look for a 5-footer who says he's good, he'd look for a 7-footer with proven skills, someone he knows is good. Similarly, investors should look for companies with sustainable competitive advantages. One way to find companies with these advantages is to look for companies with high returns on their invested capital, which I discussed in this space last week.

A 7-footer is as unlikely to shrink to 5 feet as a great company such as Dell or Wal-Mart is to lose its pricing advantage. Like a great athlete, both of these companies have proven track records of withstanding fierce competition.

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