How to Assess Business Quality

The Psychology of Checklists

Chris Hill - ex long-running host of the Motley Fool podcast and one of the more sensible voices in financial media - once told me a story that perfectly encapsulates everything wrong (and occasionally right) with how humans make investment decisions.

It’s 1999. Chris is recovering at home from some serious dental work, absolutely off his face on what sounded like very decent painkillers. Proper loopy. The internet is nascent, cable TV is his main entertainment, and in his medicated haze, he flicks onto C-SPAN (genuinely gavel to gavel coverage of the US Government affairs). As you do in these situations.

He lands on a trade association meeting. Riveting stuff, normally. But there’s a young CEO giving a keynote address, and Chris is utterly captivated. In the fog of painkillers and post-dental delirium, this man seems “brilliant”. Chris loves him. Believes everything he’s saying. The conviction is overwhelming.

So he does what any rational person would do in such a state: he gets off the sofa, fires up his PC (this takes about five minutes- BONG! - it’s 1999), and buys a chunk of shares in this company.

The next morning arrives with all the gentle grace of a hangover after a particularly busy one. Chris starts re-piecing the previous day together.

“Did I... did I buy shares in a company last night? I think I might have done that.”

Here’s where the story gets interesting: Chris got extraordinarily lucky that day. The trade show he’d watched was the annual meeting of US Publishers. The speaker who’d captivated him in his less-than-lucid state was none other than Jeff Bezos. Chris had bought shares in Amazon.

Now, Chris freely admits this was pure dumb luck. He made an investment decision while literally impaired by prescription medication, based entirely on vibes from a bloke on the telly. No analysis. No due diligence. No process whatsoever. Just pharmaceutical-grade conviction.

And it worked out brilliantly.

But here’s the thing: this is not a strategy. You cannot build a successful investing career on painkillers and C-SPAN. For every Chris-buying-Amazon-while-zonked story, there are ten thousand people who bought pets.com because the sock puppet was charming, or Enron because the executives seemed confident, or any number of disasters because something felt right.

Chris got lucky. What you need is a system that makes you luckier more often.

This is Part 1 of a ten-part series on building an investment process that doesn’t rely on your gut, your “feel for the market” pharmaceutical enhancement, or whatever other nonsense you tell yourself when you’re about to make a questionable decision. By the end, you’ll have a framework - the Core Score - that turns the messy, emotional business of stock picking into something approaching a science.

Why This Series Exists

I've done around 50 Q&As and spoken to hundreds of new investors. The same question keeps coming up:

"Everyone says do your own research, but nobody seems willing to tell me what that is."

At least, not without making you pay for it.

So here it is. A process. Free. A good place to start.

Will it make you the next Warren Buffett? No. But it might give you a framework that keeps you from making obvious mistakes, helps you think systematically, and tilts the odds in your favour.

The books I reference in this series are the best I've found - I'm recommending them because they're worth reading, not because I have to. They'll be affiliate-linked in the comments, so if you buy any, I'll get a small kickback. Alternatively, you can buy me a coffee, but that's not necessary.

But first, we need to talk about why you need this at all.

Your Brain on Stocks: A Horror Story

Every investor, from the punter with three shares in their ISA to the hedge fund manager with billions under management, suffers from the same fundamental problem: we’re all human. And humans are walking collections of cognitive biases wrapped in overconfidence and tied together with narrative fallacies.

I’ve written extensively about specific biases before (if you want the deep dives, check out my posts on all the biases and effects we suffer from ), but let me give you the greatest hits:

Confirmation Bias: You think Company X is brilliant, so you only read articles that confirm this. The twelve red flags? Didn’t see them. The analyst reports pointing out structural problems? Must be idiots who don’t “get it.”

Availability Bias: That stock your mate Dave won’t shut up about? Now it’s taking up disproportionate space in your decision-making, despite the fact that Dave also thought that all SPACs were “definitely going to the moon” in 2021.

Anchoring: The stock was £50 last year and now it’s £25, so it must be a bargain! Except you’re anchoring to an arbitrary price point. Maybe it was wildly overvalued at £50. Maybe it’s still overvalued at £25. Your brain doesn’t care - it just likes the discount.

Narrative Fallacy: Humans are storytelling machines. We take random, chaotic data and weave it into coherent narratives. “This company is the next Amazon!” No, mate, it’s a frozen lasagne maker with questionable unit economics. But the story feels good, so you believe it.

Sunk Cost Fallacy: You’ve held this dog for three years. It’s down 60%. But you’ve spent so much time on it, surely it’ll come good? Nope. You’re throwing good money after bad because you can’t admit you were wrong.

The list goes on. And here’s the kicker: knowing about these biases doesn’t make you immune to them. Chris Hill knows more about investing than most people ever will, and even he nearly made a catastrophically stupid decision (that happened to work out). You need a system that removes the opportunity for your brain to bollocks things up.

Enter: The Checklist

If you’ve read Michael Shearn’s The Investment Checklist (and if you haven’t, you should - even if it’s a bit dated now), you’ll know that checklists aren’t just for pilots and surgeons. They’re for anyone whose job has high stakes and low margin for error. Which, let me check my notes, ah yes - that’s investing.

The beauty of a checklist is brutally simple: it forces you to ask the same questions, in the same order, every single time. No shortcuts. No “yeah but this one’s different.” No getting swept up in the narrative. Just cold, hard evaluation.

The framework we’re building across this series is called the Core Score. It’s a quantitative system for grading qualitative traits, scoring companies out of 100 across six categories:

1. Financials - Is the money printer working?

2. Moat - Can anyone replicate this easily?

3. Opportunities - Is there room to grow?

4. Customers - Do people actually give a toss?

5. Revenue - Is it sticky, recurring, growing?

6. Culture - Do the people running this place know what they’re doing?

And then there’s The Gauntlet - a series of red flags that can torpedo an otherwise decent score. Because sometimes, one fatal flaw is enough.

Score 70+? Consider buying. 50-70? Watchlist. Below 50? Nope. Move on. Don’t look back.

Simple? Yes. Easy? Absolutely not. Because the hardest part isn’t the scoring - it’s forcing yourself to use the system even when everything inside you is screaming “BUT THIS ONE’S SPECIAL!”

The Philosophy: Inversion

Charlie Munger had a saying he borrowed from the mathematician Carl Jacobi:

“Invert, always invert.”

In other words, instead of asking “what will make this company succeed?” ask “what will make this company fail?”

This is the heart of The Gauntlet. Before you get seduced by the growth prospects or the charismatic founder or the sexy product, you need to ask: what could kill this?

• Customer concentration over 20%? One contract loss and you’re toast.

• Debt position that makes your eyes water? Good luck surviving a recession.

• Exposure to currency risk or country risk? You’re now betting on macroeconomics, not the business.

• Rapid dilution? Congrats, you’re being slowly expropriated by management.

These aren’t minor concerns you can hand-wave away. They’re fundamental weaknesses. And if a company fails The Gauntlet, it doesn’t matter how good everything else looks - you walk away.

This is where most investors go wrong. They fall in love with the upside and ignore the downside. They focus on what could go right and assume away what could go wrong. Inversion forces you to confront reality.

Chris Hill’s painkiller-fuelled punt on Amazon could just as easily have been a painkiller-fuelled punt on WorldCom. The lesson isn’t “trust your drugged intuition” - it’s that even smart people make emotional, irrational decisions without a system to protect them from themselves.

Where Do I Even Find These Companies?

Right, so you’ve got a scoring system. Brilliant. But where do you find companies to score in the first place?

This is your top of funnel - the process for identifying candidates worth running through the checklist. Because you can’t score every company on the London Stock Exchange. You’d die of boredom before you got through the first hundred.

Here’s how I think about it:

Start with quality filters:

• Market cap > £500m (depending on your risk tolerance)

• Positive free cash flow (if you’re conservative)

• Revenue growth > X% over 3 years

• Return on invested capital > cost of capital

Use screeners intelligently:

Tools like Stockopedia, Fiscal.ai, or even a well-configured Google Sheet can help you filter for these basic metrics. Don’t overcomplicate it. You’re not looking for perfection - you’re looking for interesting enough to warrant deeper investigation.

Follow the breadcrumbs:

• What are great investors buying?

• What are insiders buying?

• What keeps popping up in your research?

• What’s adjacent to companies you already like?

Read widely, promiscuously, obsessively:

Annual reports. Industry journals. Trade publications. Obscure blogs. Twitter threads from people who actually know what they’re talking about (rare, but they exist). The best investment ideas often come from the edges, not the centre.

Build a watchlist:

Not everything needs to be scored immediately. If a company looks interesting but the valuation’s bonkers, stick it on the watchlist. Check back in six months. Patience is a competitive advantage.

The funnel works like this, but your mileage should vary:

1. Universe (1000’s)

2. Filtered candidates (100-300)

3. Worthy of initial review (100)

4. Full Core Score analysis (maybe 30-50 per year)

5. Portfolio positions (20-30, depending on your approach)

Each stage removes the rubbish. By the time you’re running a full Core Score, you should already have conviction that this is worth your time.

Why Quantifying the Qualitative Actually Works

Here’s where it gets interesting. Most of the things that matter in investing aren’t easily quantifiable. Brand strength. Company culture. Management quality. Competitive moat. These are fuzzy, subjective concepts.

The Core Score doesn’t pretend they’re not subjective. Instead, it forces you to make your subjectivity explicit and consistent.

When you give a company 3 points for “Premium Brand,” you’re not pulling that number out of thin air (well, you shouldn’t be). You’re asking: Is this brand genuinely premium? Do customers pay more for it? Is it defensible? Would I care if it disappeared?

The magic happens when you apply the same rigour to every company. Suddenly you can compare apples to apples. You can look back at your high-scoring companies and ask “did they actually perform?” You can refine your criteria. You can spot patterns in your own biases.

This is how you get better. Not by trusting your gut more, but by building a system that makes your gut accountable.

What’s Coming Next

Over the next nine parts, we’re going to build this framework piece by piece. We’ll go deep on each category of the Core Score - what to look for, how to score it, where beginners go wrong. We’ll talk about finding companies, valuing them, and knowing what to look for. We’ll cover the psychological traps that catch even experienced investors.

If you need a refresher on basic accounting along the way, grab a copy of Mike Piper’s Accounting Made Simple. It’s short, clear, and will give you the foundation you need. But we’ll cover the essentials as we go.

By Part 10, you’ll have a complete, battle-tested system. Not a crystal ball—those don’t exist. But a framework that removes emotion, enforces discipline, and gives you a fighting chance of not cocking it up.

Because here’s the thing: investing isn’t about being brilliant. It’s about being systematic. It’s about not making the obvious mistakes. It’s about having a process you trust enough to follow even when it’s boring, even when it’s painful, even when your brain is screaming at you to do something else.

Chris Hill got lucky once. But luck isn’t a process. The checklist isn’t gunna be sexy. But it works. And that’s really all that matters.

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Next Week: Part 2 - Financials: Show Me the Money

What metrics actually matter? How do you spot financial engineering? And why is cash flow sexier than earnings?

This post is sponsored by Trading 212.

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