In one sentence: Phil brings an 11-step draft checklist that applies to all three valuation methods (margin of safety, payback time, cap rate), explains why a short checklist protects against skipped steps, and walks through the first three items.
Key ideas
- The problem. Most people can't save enough on 4–7% returns, and the old pension safety net is gone. Phil gives his father's $5,000 house (about a year's income) as a comparison with today's costs. [00:00–06:00]
- Why a checklist. Phil cites Atul Gawande's The Checklist Manifesto: surgeons and pilots skip simple steps once a task becomes routine. Good checklists are short and name what to check, not how. [06:00–11:00]
- Eleven items, no more, no fewer. Phil says Gawande advised against going past about eleven, and that a suggestion must replace an item, not add one. It's a draft. [13:00–17:00]
- The 11 steps. (1) Historical growth rate reasonably consistent. (2) Next 7–10 years' growth reasonably predictable. (3) P/E for a bull-market sale in 10 years is reasonable and historical. (4) MARR is 15%. (5) Find TTM EPS. (6) Find free cash flow. (7) Find owner cash flow. (8) Calculate margin of safety, payback time and cap rate. (9) Two of three show it on sale. (10) A trusted guru is buying. (11) An obvious event with a 1–3 year duration created fear. [16:30–22:30]
- The zombie is dropped. The tangible-book-value method gets set aside as not worth the time for now. [11:00–12:30]
- Item 1 is the back window. Look at past growth to see whether the business is consistent: Chipotle's early years rise steadily, while GM in the 1990s bounced about. The site's growth-rate chart shows this. [22:30–25:00]
- Item 2 is the front window. You get paid for future cash flow, so the growth rate has to be predictable because of the industry, the moat and the management, not just because the past was steady. Phil wants a "six-inch bar", not a four-foot one. [25:00–28:30]
- Item 3. Assume you sell in a good market in year 10, using a P/E no higher than the company's historical range. Ideally you never sell. [28:30–31:00]
- Twenty great companies. Danielle is reading 20 annual reports this month. Phil says finding 20 good companies in a lifetime is enough, and recalls Buffett's 20-hole card (see 011, 002). [31:00–33:30]
How it maps to RuleOne
- The checklist is essentially the screen's scoring rubric. Items 1–3 and 5–8 map to the stock page's growth, P/E, EPS, FCF and valuation numbers, item 10 to 13F data and item 11 to the event watch.
- Judgement items (2 and the moat check) are left to you; the app can show numbers but not decide predictability.
Buffett, Munger and Graham links
- Phil takes the checklist idea from Gawande, who is not a value-investing source. Munger also champions checklists (see his talks collected in Poor Charlie's Almanack), though this episode doesn't cite him.
- "If librarians could get rich" is Phil's paraphrase of a Buffett idea: you are paid for future, not past, cash flow.
- The 20-punch card comes from Buffett's talks to students, repeated in Alice Schroeder's The Snowball. Check before quoting.
Words to know
- Checklist: a short list of things to verify each time so you don't skip steps.
- TTM EPS: trailing-twelve-month earnings per share.
- MARR: minimum acceptable rate of return (Phil uses 15%).
- Back window / front window: past record versus future prediction.
Try this
Print the 11 steps. For one company on All stocks, tick each item you can verify from its page, and mark the ones you couldn't (item 2 especially). Count how many you'd need before buying.
Check yourself
- Why does Phil insist on exactly 11 items?
Answer
He wants it short enough not to overwhelm yet complete; changes must swap one item for another, not add one. - What is the difference between items 1 and 2?
Answer
1 looks at the past growth record; 2 asks whether the next 7–10 years can be predicted given the moat and the industry. - Why use a historical P/E for the future sale?
Answer
A multiple above its history is unlikely to hold, so it would overstate the value.
Short quotes
"We want you to jump over a six inch bar here, not a four foot bar." (Phil, ~27:30, auto-transcribed)