Checklists to Improve Investment Decisions

Investment checklists reduce decision errors by 20-40% through systematic coverage of critical inputs. Aviation industry reduced fatal errors 60% with pre-flight checklists; institutional investors report similar gains from pre-trade protocols.

Buy Checklist

1. Valuation floor — Forward P/E <20, EV/EBITDA <12, or DCF indicates >15% upside. No exceptions for "story stocks."
2. Technical confirmation — Price >50-day MA, RSI 40-60 (not overbought), volume >20-day avg on breakout.
3. Catalyst within 6 months — Earnings inflection, new product launch, regulatory approval, or index inclusion. No "eventually good" thesis.
4. Balance sheet health — Debt/EBITDA <3x, interest coverage >5x, cash >2x current liabilities.
5. Insider activity — No C-suite sales last 90 days. Bonus: insider buying >$500k aggregate.
6. Competitive moat — Identify durable advantage: network effects, switching costs, brand, or regulatory barrier.

Sell Checklist

1. Thesis invalidation — Original catalyst failed (product delay, regulatory rejection, management departure). Exit immediately.
2. Valuation extreme — Forward P/E >30 with PEG >2.5. Take profits when price exceeds fair value by >25%.
3. Technical breakdown — Price <50-day MA for 10+ days, volume spike on down days, or breaks key support.
4. Relative weakness — Underperforming sector by >10 pp over 3 months with no fundamental excuse.
5. Better opportunity — Identified superior risk-reward elsewhere. Reallocate capital to higher-conviction idea.

Rebalance Checklist

1. Drift >5 pp — Any asset class exceeds target allocation by >5 percentage points.
2. Position concentration — Single position >10% of portfolio. Trim to 8% regardless of conviction.
3. Tax-loss harvest — Identify positions down >10% in taxable accounts. Sell and replace with correlated substitute.
4. Annual reset — Every December, restore to target allocation regardless of market conditions.
5. Cash deployment — If cash >15%, deploy 50% within 30 days unless VIX >30 or recession probability >40%.

Checklist Hygiene

• Version control — Update checklist quarterly. Log changes with rationale (e.g., "raised P/E threshold from 18 to 20 after inflation regime shift").
• Completion tracking — Log every checklist use. Target ≥90% completion rate. <80% indicates checklist failure—revise for simplicity.
• Outcome analysis — Quarterly review: compare trades following full checklist vs. partial. Typical finding: full-checklist trades outperform by 3-5 pp annually.
• Exception documentation — If overriding checklist (e.g., buying despite high P/E), write 200-word memo explaining why. Review exceptions every 6 months.

Error reduction: pre-checklist (2019), investor made 45 trades with 22% loss rate. Post-checklist (2020-2023), 38 trades with 8% loss rate. Impulse trades eliminated; 220 bps annual alpha from disciplined entry/exit.