The simple checklists
used by pilots and doctors every day have saved countless lives. Use these
investment checklists to avoid losing money.
On October 30 1935 an
early test flight of America's first four-engine bomber, the Boeing B-17, ended
in disaster when it nose-dived into the ground just after takeoff.
Overwhelmed by the
number of different tasks involved in flying what was one of the most complex
aircraft of its time, the crew simply forgot to check that a lock on the
controls had been disengaged.
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The crash led to the
development of the pre-flight checklist, which pilots around the world now use
routinely to ensure that the plane is ready to fly in every respect before
takeoff.
An American surgeon,
Atul Gawande, realised that his profession also made mistakes by forgetting key
tasks – mistakes that could be avoided by the use of checklists. The
introduction of these simple but vital to-do lists has saved countless lives in
aviation, medicine and many other fields.
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When it comes to
investing, checklists could save you a lot of money.
"If checklists
designed to focus on the most vital areas and cut out unnecessary distractions
can help people stay alive, then they can surely be applied to the financial
markets," said Russ Mould of AJ Bell, the investment shop.
Mr Mould has come up
with two checklists – one of warning signs, the other of positive aspects of a
potential investment.
First, check whether a
company has any of these 10 attributes, Mr Mould said. Any should give
investors cause for concern.
1. Is there a dominant
chief executive or shareholder?
2. Have there been
frequent or transformational acquisitions?
3. If there is a focus
on growth, what exactly is the company trying to grow? Focusing on growth in
"earnings per share" or EPS is a particularly worrying sign, Mr Mould
said.
4. Are there management
bonuses that are triggered easily (usually via a level of EPS)?
5. Do the accounts regularly
feature "exceptionals" and unintelligible footnotes?
6. Is the profit figure
significantly bigger than the amount of cash generated?
7. Is interest cover –
the ratio of profits to debt interest – less than 2?
8. Is dividend cover
(profits divided by dividends) less than 2?
9. Does the company
have a "mix of high operational and financial gearing"? Operational
gearing means profits heavily depend on a particular level of sales, while
financial gearing is simply having a lot of debt.
10. Do returns on
capital consistently fail to exceed the cost of capital?
Now, here are 10
aspects of a company that could make it worth considering.
1. Is there "share
price momentum"? A steadily rising price can indicate that investors are
gradually waking up to a company's strength.
2. Do the shares trade
at a discount relative to the company's peers and the market?
3. Is the company's
market share on a rising trend?
4. Is there a record of
rising profits and dividends?
5. Have the company's
directors been buying shares?
6. Is the consensus
among stockbrokers' analysts a "buy" rating? Try to focus on research
that is certified as "independent".
7. Are profit forecasts
rising steadily?
8. Is interest cover
sufficient?
9. Are there any
activist investors or hedge funds on the shareholder register? This could
indicate that the company is about to be shaken up, potentially freeing it from
poor management or a record of operational mistakes.
10. Is there a good
standard of corporate governance? The chairman and chief executive should be
separate and there should be strong non-executive directors.
By Richard Evans
This
article is from The
Telegraph
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