Is this the best way to avoid toxic stocks?

It may sound sadistic but we have taken great pleasure in knowing how a few people failed miserably in stocks. Simply because had that not been the case, the discipline of investing wouldn't have progressed this far. Take the father of value investing, Benjamin Graham for example. It is being believed that The Great Depression of the 1930s nearly wiped out Graham's entire net worth. And thus it was from this experience that he got the inspiration to create a framework for analysing stocks. And what an inspiration it was! Suffice to say that the tenets that he developed helped to create one of the most successful schools of investing.

Is it any wonder then in hindsight, it was actually good that Graham failed in investing. Likewise, we are also tempted to feel happy about the losses a certain investor suffered in the recent financial crisis. For it was his losses that led to the emergence of a very useful technique of analysing stocks.

The investor we are talking about is a gentleman called Mohnish Pabrai. Now, Pabrai was a very successful value investor up until financial crisis. But then disaster struck and he suffered huge losses. After lot of soul searching, he stumbled upon this wonderful idea of a checklist. And this checklist we believe is one of the simplest yet one of the most effective ways to avoiding errors in stock picking.

In Pabrai's case, he went back in history and analysed all the investment mistakes he made. Not only this, he also went back and analysed investment mistakes made by great investors like Warren Buffett and Charlie Munger. What he saw was certainly shocking. In most of the cases, the mistakes turned out to be pretty obvious. Not just that. The mistakes were also extremely basic. In other words, it wouldn't have taken a genius to figure out the source of error.

And herein lies the biggest insight we believe. To be a successful investor, it is obvious that you have to follow an investing framework that has stood the test of time. And once you do this, you only have to keep your mental biases in check. Because even the greatest investors are susceptible of not being able to do so. Fortunately, the concept of checklist will make your task much easier.

All you have to do is note down the reasons behind the investment mistakes you've made and also the ones made by other great investors. And soon enough, you will have some 30-40 points that you could use to evaluate every new investment of yours. Of course, over time the items on the checklist will grow and we are sure you'll be amazed at your ability to make much lesser number of mistakes. Especially mistakes that are pretty obvious but others that don't use the checklist keep on making.