THE ULTIMATE

INVESTING CHEAT SHEET

A Checklist For Picking Great Stocks
By Aikido Finance
TABLE OF CONTENTS
3. What Makes A Good Checklist?
8. The Value Checklist
9. The Efficiency Checklist
10. The Health Checklist
11. The Dividend Checklist
12. The Growth Checklist
13. The Ratings Checklist
14. The Technicals Checklist
15. The Management Checklist
16. The Impact Checklist
17. The Performance Checklist
18. Questions
19. How To Build A Portfolio Using Checklists
30. Appendix
WHAT MAKES A GOOD CHECKLIST?
Good checklists are precise, efficient, and
easy to use even under difficult conditions. It
safeguards the investor from making impulsive
& emotional decisions.

“If you can’t describe what you are doing as a

process - you don’t know what you are doing”
- W. Edwards Deming

Checklists are a great way to quantify what you

are doing. Using systems, structure, and
strategy in your investing can help improve
returns, save time, and greatly reduce stress.
 STOCK PICKING DOESN’T WORK
CXO tracked the results of 6,582 predictions from 68 investing gurus,
made between 1998 and 2012.

Despite having some well-known names in the sample, the average of

the gurus’ accuracy (47%) didn’t beat a coin toss.

42 gurus had accuracy scores below 50%

“The investor’s chief problem - and even their worst enemy is likely to be
themself” - Ben Graham
SERIOUSLY…
UC Davis professor Brad Barber studied the buy and sell
recommendations of Wall Street analysts.

What he found was that the analysts buy recommendations

underperformed by 3% per month, while their sell
recommendations outperformed by 3.8% per year!
USE A RULES-BASED APPROACH INSTEAD
Dresdner Kleinwort conducted a study into the diagnosis of psychosis. It was
shown that quantitative methods vastly outperform qualitative methods.

When medical doctors used a simple model to make medical decisions,

accuracy increased from 59% to 83%
QUANTITATIVE INVESTING
There's a reason why 6 out of 10 of the top
performing hedge funds are quant firms.

Renaissance's Medallion quant fund is famed

for the best track record on Wall Street,
returning more than 66 percent annualized
ex-fees over a 30-year span from 1988 to
2018.

On a typical trading day 90% of trades are

made by computers.

Blackrock estimate the Factor industry to

grow to $3.4T by 2022.
 WHAT IS QUANTITATIVE INVESTING?
Data-Driven investing

Rules-based Backtested Performant

Quantitative investing makes investment decisions using a systematic approach – following a

recipe or set of rules, based on long term historical evidence.

It can provide higher returns, lower risk, reduced stress, and greatly decrease the time it takes to
build a portfolio.
It is the modern way to construct a portfolio.
Here’s some example strategies
 Dividend, Size strategy

A 15.45% average return Market Cap

Shareholder
Yield
Small Top decile
0.65 Sharpe ratio
-55.73% largest drawdown
Market
USA

Rebalance: Yearly Weighting: Equal

 Size, Value strategy

A 18.96% average return Market Cap EV / EBITDA

Small Decile 1
0.75 Sharpe ratio
-55.94% largest drawdown
Market
USA

Rebalance: Yearly Weighting: Equal

 Size, Value, Momentum strategy

A 22.33% average return Market Cap Price / Book

Microcap Top 3 decile
0.85 Sharpe ratio
-53.89% largest drawdown
Market Positive Ranked by
3m & 6m 12m price
USA momentum momentum

Rebalance: Yearly # Companies: 25

Weighting: Equal
DON’T BE A HEADLESS CHICKEN
Use a Quantitative Approach
THE CHECKLISTS
THE VALUE CHECKLIST
🮮 Price / Earnings < 15.0
🮮 Price / Book Value < 1.5
🮮 Price / Sales < 1.5
🮮 Price / FCF < 15.0
🮮 PEG < 1.0
🮮 Price / TBV < 0.7
🮮 Price / NCAV < 1
🮮 EV / EBITDA < 8.0
🮮 Current P/E is <40% of 5yr P/E High
🮮 Current P/E is <80% of 5yr P/E Low
🮮 Margin of safety below Intrinsic value > 30% Value
🮮 Intrinsic Value / current price < 0.7
THE EFFICIENCY CHECKLIST
🮮 ROE > 30%
🮮 ROA > 15%
🮮 ROTA > 20%
🮮 ROIC > 20%
🮮 ROCE > 20%
🮮 ROIC-WACC > 0.2
🮮 Inventory Turnover > 4.0
🮮 Accounts Payable Turnover > 3.0
🮮 Accounts Receivable Turnover > 5.0
🮮 Pre-tax Margin > 15%
🮮 Free Cash Flow Margin > 10% Efficiency
THE HEALTH CHECKLIST
🮮 Current Ratio > 1
🮮 Quick Ratio > 1.5
🮮 Flow Ratio < 1.25
🮮 Liabilities / Equity < 0.8
🮮 Debt / Equity < 0.5
🮮 Debt / EBITDA < 4.0
🮮 Debt / TBV < 0.7
🮮 EBIT / Assets > 20%
🮮 Debt / NCAV < 2.0
🮮 Long-term Debt / Working Capital < 2.0
🮮 Interest Coverage Ratio > 8.0 Health
🮮 FCF / Sales > 8%
THE DIVIDEND CHECKLIST
🮮 Dividend Yield > 2%
🮮 Dividend Yield > ⅔ the AAA Bond Yield
🮮 Number Of Consecutive Years Increasing Dividends > 9
🮮 FCF / Dividends Paid > 2.5
🮮 EPS / Dividends Paid > 2.5
🮮 Payout Ratio < 40%
🮮 No Dividend Cuts In The Last 10yrs

Dividend
THE GROWTH CHECKLIST
🮮 Earnings Yield > 12%
🮮 EBIT Yield > 12%
🮮 # Of Years Where Earnings Growth <2X Federal Bond Yield < 2
🮮 FCF Yield > 10%
🮮 Forward P/E / Trailing P/E > 1.1
🮮 Operating Cash Flow > EPS
🮮 # Of Years With Declining EPS < 2
🮮 Current EPS / EPS 10yrs ago > 3.0
🮮 Earnings Misses in the Last 24 Months = 0

Growth
THE RATINGS CHECKLIST
🮮 Altman Z-score >= 3.5
🮮 Piotroski F-score >= 7.0
🮮 Beneish M-score < -3.0

Ratings
THE TECHNICALS CHECKLIST
🮮 Positive 1-month price momentum
🮮 Positive 3-month price momentum
🮮 Positive 6-month price momentum
🮮 SMA 50 > SMA 200
🮮 EMA 12 > EMA 26
🮮 RSI < 30
🮮 Positive HMA

Technicals
THE MANAGEMENT CHECKLIST
🮮 Management shareholding > 10%
🮮 Management have bought more shares than were sold in last 3 months
🮮 Management Compensation growth rate < Revenue Growth Rate

Management
THE IMPACT CHECKLIST
🮮 CDP Climate Score = A
🮮 Total ESG Risk Score > BB
🮮 Beneish M-score < -3.0

Impact
THE PERFORMANCE CHECKLIST
Look at the last 10 years of data, year over year and make sure there is low volatility and high growth for:

🮮 Sales
🮮 Earnings
🮮 Book value
🮮 Free cash flow
🮮 dividends
🮮 Return on equity
🮮 Current ratio
🮮 Debt / equity (declining)
🮮 Net margin (declining)
🮮 Inventory turnover Impact
QUESTIONS
Stay away from qualitative judgement as much as you can. But if you must:

🮮 Can I say in one sentence what the company does?

🮮 Does the company have a competitive advantage / moat?
🮮 Does the company have few / no competitors?
🮮 Is the company within my circle of competence?
🮮 Have I read at least the most recent earnings report?
🮮 Do I trust / like the management?
🮮 Does the company have a credit rating of at least BB?
🮮 Do I like this company?
🮮 Is the company ethical?
🮮 Does this company give me international exposure? Questions
🮮 Will this company be around in 20 years?
QUESTIONS CONTINUED...
🮮 If the stock market closed tomorrow for the next five years, would I still buy this company?
🮮 Will this company help diversify my portfolio?
🮮 Does the company treat its employees well?
🮮 Are insiders buying shares?
🮮 Is the industry and company sustainable?
🮮 Is the company still growing?
🮮 Are analysts optimistic about the company?
🮮 Is the stock "screaming" cheap?
🮮 Can I say in one paragraph why I am buying this company?
🮮 Do I have an exit strategy? Questions
HOW TO BUILD A PORTFOLIO
USING THE CHECKLISTS
 Step 1
● Have a six month emergency cash pile
Choose the
Amount to Invest ● Pay off high interest debt first
● Eliminate your worst spending habits
● Think about your time horizon
● Max out your pension contributions

eg. $10,000
 Step 2
Choose Your
Market(s)
● Countries
● Industries

eg. US stocks (all Industries)

Step 3 Market Capitalizations

Choose the Nano-cap (<$50M)

Company Size Micro-cap (<$300M)
Small-cap (<$2B)
Mid-cap (<$10B)
Large-cap (<$200B)
Mega-cap (>$200B)

eg. Micro-cap
 Step 4
Value Efficiency Health
Filter Based On
The Checklists
Dividend Growth Technical

Ratings Manage Impact

eg. P/S < 1 and Positive 3&6-month Momentum

 Rank the remaining companies
by another metric:

Step 5
Value
Rank The Filtered Efficiency Health

Companies
Dividend Growth Technical

Ratings Manage Impact

eg. Rank by 1-Year Price Momentum

Portfolio size: Step 6
● 10 stocks Pick Stocks
● 25 stocks
● 50 stocks

eg. Buy top 25 Companies in the List

Step 7 1. Divide your amount to invest
Purchase the
equally over the stocks you wish
Stocks
to invest in.
2. Go to your broker and buy the
stocks

eg. This Video

 MICROCAP MOMENTUM STRATEGY
The Same Strategy Outlined Above

Market Cap Price / Sales

$10k invested in 1965 Microcap <1
would have grown to $95M
today.
Market Positive Ranked by
An 18.1% annual return USA
3m & 6m
momentum
12m price
momentum

Rebalance: Yearly # Companies: 25

Weighting: Equal

*S&P500 returned $1M @ 8.79% per annum during this same period.
Backtested returns. Past performance is not indicative of future results
REBALANCING
In order to keep your portfolio up to date, you will need to buy and sell
some stocks each month (this can alternatively be done each year).

So, how do I rebalance?

1. Choose a monthly contribution amount (you will add this extra
contribution to the portfolio)
2. Run the filters / checklists again to get the new list of companies
3. Compare the new list of companies to the companies currently in your
portfolio
a. Sell companies/shares that have exited the list
b. Buy companies/shares that have entered the list
Appendix
 Fig 1.

Value
NOTES ON VALUE
Value is the most famous investing factor. It has long been known about, since the ground-breaking
work by Benjamin Graham showing that undervalued companies perform better in the long-run. It
was truly made famous as a factor by legendary investor Warren Buffett.
Value is an excellent factor.

Fig 1. The performance of P/E (Value) since 1965. The universe of stocks is split into deciles by
Price-to-earnings. The lowest P/E ratio to the highest P/E ratio. The portfolio was rebalanced each year
to keep it up to date. We can see that the decile with the lowest P/E returned an average of ~16% per
year, whilst the highest P/E returned an average of ~5% per year.

Key Takeaway: Pick undervalued companies

 Fig 2.

Efficiency
NOTES ON QUALITY
Warren Buffett also looks for high quality and efficient companies. Companies with high margins
and efficiency are outperforming their competitors and more likely to have a well-established moat.
Efficiency is a good factor.

Fig 2. The performance of ROE (Efficiency) since 1965. The universe of stocks is split into deciles
by Return on Equity. The highest ROE to the lowest ROE. The portfolio was rebalanced each year
to keep it up to date. We can see that the decile with the highest ROE returned an average of ~12%
per year, whilst the lowest ROE returned an average of ~6% per year.

Key Takeaway: Pick efficient companies

 Fig 3.

Health
NOTES ON HEALTH
Notes on Health:
Healthy companies are less likely to go bankrupt. While there are some correlations between
return and health, it should be used in conjunction with other factors. We can see that companies
who take on either too much debt or too little debt suffer. It is important to take on debt to grow, but
not too much or the company will go bankrupt.
Health is a poor factor when used on its own.

Fig 3. The performance of D/E (Health) since 1965. The universe of stocks is split into deciles by
Debt-to-equity. The highest D/E ratio to the lowest D/E ratio. The portfolio was rebalanced each
year to keep it up to date. We can see that the decile with the highest D/E returned an average of
~11% per year, whilst the lowest D/E returned an average of ~10.5% per year.

Key Takeaway: Pick healthy companies

 Fig 4.

Dividend
NOTES ON DIVIDEND
Dividend investing is one of the most popular forms of investing amongst fundamental investors.
When dividend investing, it is important to reinvest your dividend payouts to maximise the
compound effect.
Dividend is a good factor.

Fig 4. The performance of Dividend since 1965. The universe of stocks is split into deciles by
Dividend Yield. The highest dividend yield to the lowest dividend yield . The portfolio was
rebalanced each year to keep it up to date. We can see that the decile with the highest dividend
yields returned an average of ~11.5% per year, whilst the lowest dividend yields returned an
average of ~9.5% per year.

Key Takeaway: Pick dividend-paying companies

 Fig 5.

Technical
NOTES ON MOMENTUM
Momentum (Relative Strength) is the most well-known and simplest of the technical metrics.
It simply looks at the price increase between two points in time. It plays on investor psychology and
can be summarised as “a security that has gone up in the recent past is likely to keep going up, and
visa versa”
Momentum is an excellent factor.

Fig 5. The performance of Momentum since 1965. The universe of stocks is split into deciles by
Momentum. The highest 6-month momentum to the lowest. The portfolio was rebalanced each year
to keep it up to date. We can see that the decile with the highest momentum returned an average of
~14% per year, whilst the lowest momentum (negative) returned an average of ~4% per year.

Key Takeaway: Pick companies with recent price increases

 Fig 6.

Size
NOTES ON SIZE
It is well-known that small-cap companies perform better than large-cap companies in the
long-term. The size factor is very powerful, though it should be noted that the lion’s share of returns
came from those stocks with a market cap less than $25M.
Size is a good factor.

Fig 5. The performance of Size since 1965. The universe of stocks is split into deciles by Size. The
largest companies to the smallest. The portfolio was rebalanced each year to keep it up to date. We
can see that the decile with the largest companies returned an average of ~8.5% per year, whilst
the smallest companies returned an average of ~11% per year.

Key Takeaway: Stay away from the largest cap companies.

FINAL NOTES
The checklists outlined in this document use static filters (eg. P/E < 15). That is because it is the
easiest way to screen. However, there is another very powerful way to screen: Percentiles.

eg. P/E is in lowest 10% of all stocks

eg. P/E is 20% lower than the lowest the stock’s P/E has ever been
eg. P/E is in the lowest 10% of all stocks within the industry
 Rules-based Investing
Data-driven Investing
Automated Investing

Create a quant portfolio for free with Aikido Finance