The Value Investor 5 point checklist

value investor checklist

Welcome to the magical world of value investing. We do not speculate and we do not like risk.

As a value investor you are looking for, well, value. Above everything else. Companies with strong financials and opportunities for growth.

Value investors invest in great companies when undervalued. And they do so for the long run, keeping shares for decades and buying every time the price dips low enough.

They may not have super impressive one-week gains, like some speculators and day traders. But in the long run, good value investors outperform everybody.

Learning value investing is a great way to build your wealth. Compounding your returns in the long term makes a killing. Just ask Warren Buffet, the greatest investor of all time, the master, has amassed a fortune of 89 billion thanks to it. If it worked for him, why wouldn’t it for you?

Anyone with the will to learn can have yearly returns of 10% to 20% with value investing, over the years, compounded that can be a lot of money.

Investing is an art and at the same time a science. It has to be studied intensively and practiced to be mastered.

Value Investing with Sven Carlin, Ph.D.

So, to help you, here is a short check list of the main points to look for when searching for an investment.

1.  Competition

 When choosing a stock investment, the first thing you should do is research the market and competition.

Your company should have something that sets it apart. A competitive advantage, not easily copied by competitors. Competitive advantages, also known as MOATS. Are as the moat in medieval castles, they protect the company market share from competitors’ attacks

 There’re 4 main competitive advantages you can look for:

  1. Network effect

The more the business spreads, the more people talk about it, the more valuable it gets. Online marketplaces are a great example.

  1. Intangible assets

An intangible asset is an intellectual property or the brand image which is not replicable by competitors. It is something unique and vital to each company. An example is KFCs secret formula or Apple’s logo.

  1. High switching costs

A customer won’t pass to the competition because it would be too much of a pain to do so. The reasons range from the cost being too high, it is less convenient, the emotional stress, the risk, the installation cost etc.

Just think about your local grocery store. You visit it, because you probably know the owner and it’s so conveniently close to your home. Changing store to one that is in another neighborhood would mean that you do not know the people working there and you are going to have to drive 5 minutes more to get there. Just not worth it.

  1. Low cost producer

The company should be able to sell better, more reliable products for less than the competition. A very difficult strategy to pull off, but the companies that manage it become empires.

One such example is of course Walmart. Nobody can beat its affordability and convenience.

2. The World around it

Now that you have found what sets the company apart, it’s time to look at the bigger picture.

  1. The trends. Society should be open to what the company is selling. It should move towards it, not slowly abandon it. Ideally you are looking for a product that is just going to pick up steam in the future, becoming part of our everyday life.
  • The market share. You are usually looking for an already established company, that can further increase its market share in expanding markets,
  • The climate. Analyze everything surrounding the company. A handy way to do so is to use something called the PESTEL analysis. Which stands for Political, Economic, Social, Technologic, Environmental, Legal. It will help you from falling into unexpected traps.


3. The Management

The next step is to look at the management, the backbone of the company. Make sure they’re competent, honest and have a great mission statement that they believe in. This will increase consumer and investor trust in the company.

 A tip to help with this is to check if they’re buying shares in the company, if they are they likely know something you do not. And when insiders buy stock, the key here is to check how long they hold them. Flipping for a quick buck is different from holding and indicates they are in it only for the money.

4. The Financials

Then look at the financial statements. The balance sheet, income statement and the cash flow statement. What you want to see here is steady profit growth, lots of investment, low debt and a mountain of cash.

 Use key metrics like current and quick ratios, debt to equity, ROI, ROE and many more.

5. The Price

The last step is to find out if the stock is a bargain. First check the PE ratio if it’s low enough, I’d say usually under 25, you can calculate the intrinsic value. The intrinsic value is in simple terms, the real value, based on prediction and fundamentals of the company.

Then set a margin of safety, a percentage by which you could be wrong. Because if you had a bridge that could only hold 8 tons, would you be comfortable driving an 8 ton truck on it? Better safe than sorry. I usually go for around 20%

 If the price of the stock is below the intrinsic value minus the margin of safety, and satisfies all of the mentioned criteria then the stock is a buy.

Disclaimer: The Content is an opinion and is for information purposes only. It is not intended to be investment or financial advice nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or any other assets. Seek a duly licensed professional for investment or financial advice.