Stock Checklist Is a Valuable Tool

 | Jan 17, 2014 | 2:00 PM EST  | Comments
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Stock quotes in this article:

FB

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twtr

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bac

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zinc

While I am not a fan of social media stocks like Twitter (TWTR) and LinkedIn (LNKD) as they sell at what I consider ridiculous valuations I am a fan of social media itself.

Sites like Facebook (FB), Twitter and LinkedIn are tools when used correctly that can help you stay in touch with old friends, find new ones and build your network across the planet. I was recently contacted by a value manger out of the West Coast and we struck up a conversation. Thanks to the shrinking world I came away with some valuable insights and tools worth sharing with the Real Money community.

At first glance you could not find two people more different than Pope Brar and I are. He is a West Coast guy who is a fan of meditation and has quotes from people like Lao Tzu and Wayne Dyer on his website; I am an East Coast guy who thinks Zen is a coffee and a cigarette and who reads the sport page. I have quotes from Earl Weaver and Hunter Thompson on my site.

We both have a deep interest, however, in the markets and a shared belief in the concept of buying dollars for fifty cents.Brar started in the business 15 years ago and worked as an analyst with several large investment firms. Not satisfied with traditional research and investment techniques, he began to study some of the great investors like Warren Buffet, Seth Klarman and Monish Pabrai to try and improve his results. He read their writings and reports and went to their meeting in search of investing insights.

It was at one of Pabrai's meetings that he ran across the concept of the checklist. While Pabrai was reluctant to share his actual checklist, he told Pope to study the mistakes of the very best investors and he would be able to put together a checklist that helped evaluate opportunities and become a better investor.

He started by reading Atul Gawan's The Checklist Manifesto. The book shows how checklists have helped accomplish some pretty impressive tasks including a dramatic improvement in the performance of B-17 bombers and emergency room treatment. He then studied the results of famous investors like Buffet, Pabrai, and Klarman as well as Charlie Munger and Bruce Berkowitz. He used the knowledge obtained from these prices to develop a checklist with more than 90 questions he uses to evaluate stocks for his portfolio.

He calls the checklist the SAVR List as he breaks up into four sections. He looks at the Sustainability of the business, the Accountability of management and the board, the Value of the company and the Risks involved in each company. The list is designed to destroy basically the investment idea and dissuade you from investing in a particular stock that caught your eye. He wants to kill the business model with the checklist and avoid value traps and the possibility of a permanent loss of capital.

No company is going to pass all the questions, but one that can pass most of them and is valued as a 50 cent-or-less dollar is going to be an outstanding investment opportunity.

It seems to be working pretty well. He opened his fund last year and told me he had seeded it for five years prior to the opening and achieved results around the 25% a year level. He wants to be one of the perennial 20% guys, as he classes them, like Pabrai, and Klarman. The trick is buying the businesses that pass the checklist and trade at no more than 50 cents on the dollar of his derivation of intrinsic value.

Brar told me that he found that the investors that earned the highest long-term returns were buying businesses at somewhere around one-third of their estimated intrinsic value and then holding them as long as it took for the value to be realized. He mentioned stocks like Bank of America (BAC) and Horsehead Holdings (ZINC) as stocks that have given enormous returns after passing the list and trading at that level.

Most of the investors I have talked to over the year guard their research avidly. The one exception I had found over the years was Chris Browne at Tweedy Browne who did everything but give me the keys to the office when we first met years ago. Now I will add Brar to the list as he has given permission to share the checklist as I see fit and you can find it here:

I am probably not going to take up meditation or hiking in the Sierras anytime soon but I will be stealing some of Pope Brar's ideas and incorporating parts of his checklist into my evaluation process.

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