Checklists are now all the rage of late due in large part to the debt of physician/author Atul Gawande’s new book The Checklist Manifesto. Steven D. Levitt at Freakonomics and Heidi Moore in the FT have recently and favorably reviewed the book. We have to admit we have not read the book but would like to some point. This is due in part because checklists can be a useful tool for investors and traders alike.
We have written previously about the dangers facing investors who invest by the seat of their pants. Checklists are an interesting way to harness the power of process to help offset the many biases we all face when investing. Investors interested in using checklists should keep in mind a few things before they get started.
Michael J. Mauboussin in his recent book Think Twice recommends the use of decision checklists to help offset some of our behavioral biases. However checklists are not a cure-all. Mauboussin notes how in unstable environments, like those found in the financial markets, building a viable checklist is much more difficult. He writes:
A good checklist balances two opposing objectives. It should be general enough to allow for varying conditions, yet specific enough to guide action. Finding this balance means a checklist should not be too long: ideally you should be able to fit it on one or two pages. pp. 141-142
Tariq Ali at the Street Capitalist blog has previously written about the usefulness of checklists for value investors. He has some background on the Gawande book worth reading and helpfully notes some of the ways a value investor could utilize checklists.
The fact of the matter is that each investor and trader is unique in their approach to the markets. So there is no universal checklist that we can consult. Investors need to build their own checklists based upon their own experiences and best practices.
This requires that you have the self-awareness to understand when, where and how you have made mistakes, errors or omissions in the past. The sad fact is that all investors have made errors. Ravi Nagarajan at The Ideas Report writes how it is important that investors examine their own errors. He writes:
Examining this type of mistake is never pleasant but it is necessary to avoid repeat performances. All investors should take the time to do the same to avoid the risk that the “memory hole” will extinguish such experiences and lead to future errors.
The use of checklists has inspired a full-length book. A blog post is not sufficient to cover all the nuances therein. Suffice it so say that checklists properly implemented can be a useful tool for investors. For that tool to be useful it needs to recognize both the inherent uncertainties of the market and the idiosyncrasies of each individual investor.