Below is a process to help one perform the due diligence necessary to make an informed decision about purchasing an equity.
Finding Investment Ideas
Researching the Business
Finding Investment Ideas
- Personal expertise – specific career and industry knowledge
- Newspapers
- Magazines
- Websites & Blogs
- What does the company do?
- Who are its competitors?
- Go through the latest 10-Q or 10-K statement and quickly review the financial statements.
Researching the Business
- Competitive advantage - determine whether it is a short term, mid term or long term investment
- Management- compensation, company perks, previous performance
- Business model
- Strategy compared to competitors
- Growth
- Risk - 10-k’s typically provide a detailed list
- Detailed look at the financial statements line by line for the past 2 or 3 years of 10-K filings and then 10 years for historical trends
- Examine ratios – debt/assets, debt/equity, price/cash flow, return on assets, return on equity, etc.
- Competitor financials – specifically compare margins and ratios
- Have I looked at the situation from different scenarios? (Company loses money, no growth, growth etc)
- Am I overconfident in the analysis because I work in the industry or otherwise?
- Have I reviewed the negative factors?
- Am I over-weighing the negative factors creating too much loss aversion?
- Am I buying just to average down?
- Am I ignoring potential risks because of the reward?
- Am I willing to purchase because I spent the time researching and feel obligated to buy?
- Is there a bias because everyone else is recommending to buy?
- Am I refusing to sell for any reason? Attached?
- Is the information I am using a consensus that can be false?
- Do I have an exit plan?