Creating an Investment Checklist

Buying and selling the correct stocks is never easy. It helps to have a defined strategy to use. The final and most important step to take is to write down the steps needed in order to buy or sell a position. Writing something down is almost like creating a contract with yourself to follow what you have determined works. It will work much better than pulling it from your head. This list will be a work-in-progress for many years as we learn from past mistakes and redefine the various steps.

This lesson will focus on setting up a list to buy a stock. There will be a future lesson on selling for the profit, but for now, on to the Buy List.

How is the list created? Start by brainstorming and writing down the different detailed criteria used in selecting a potential purchase. For example, when I began, I simply wrote down everything I could think of that was associated with my preferred style of growth investing. I had a piece of paper that listed things such as Institutional Sponsorship, Leading Industry Group, Technical Analysis, Earnings Growth, Average Volume, Market Trend, Earnings Driver, etc. After I had my general list, I went through it and eliminated things I had listed twice. At this point, I had my simple list, but the problem, I soon found out, was that it was too vague for me. When looking at a screaming (bull) market and many choices, I noticed it was too easy to quickly manipulate situations into fitting my generalized criteria, and my returns did not always reflect being in the best stocks.

For example:

Institutional Sponsorship (Most stocks nowadays have some institutional holders, so the criteria must go further and determine the quality of those holders.)

Quarterly Earnings (Any company with quarterly EPS? Obviously, they must be growing at a minimal rate.)

So on to the next step.

Defining the Criteria. I found it best to think of past scenarios I had faced in my investing and define the criteria to eliminate past mistakes I had made and studied. For example, rather than simply saying Market Trend, I would say "The market has produced an O'Neil "follow-through day" and confirmed rally. I tried to be as specific and quantitative as possible with each and every criteria.

Following the now-compiled list is the most important part. For me it was simple: write the name of the stock being analyzed at the top of the paper and go through each point, and even sub-points, checking them off one by one. I now have 14 things that must be checked off before I can buy a stock. Each item is focused on themes such as quarterly and annual earnings growth rates, institutional sponsorship, industry group quality, chart pattern, supply and demand, and finally, the market condition itself.

I could have printed my list here, but did not because it will be much more profitable to allow each trader to create their own that fits their trading style within the intermediate-term context. It also must be a checklist that fits each person's discipline. What someone else may be able to follow, I may not and vice versa. Further suggestions I can provide are to put the actual buy point on the sheet as a criterion that needs to be checked off. (This will stop certain people from "jumping the gun" on the pivot point if it's applicable, and you know who you are!) Also, write down the purchase price(s), an average quantity, price, and the price where the loss will be taken. Finally, once a position has been opened, print out and attach a current chart to the checklist for future analysis.

Eventually, the list may begin to look like this:

Stock: ____________________________

Investment Checklist for Buys (All must be checked in order to buy):

1. Institutional Sponsorship Present

2. Leading Industry Group  

3. Technical Analysis of the Stock 

1. Chart Price Pattern

2. Relative Price Strength

4. Quarterly Earnings and Sales Growth  

5. Average Volume

6. Market has produced “follow-through day” and confirmed rally  

7. Pivot Point ______

Net return on Investment ___________%_ ; Purchase Prices ________________________________

Average Qty/Price ________________________________

Stop Prices ________________________________

Good luck and Great Trading!

Tim