Investors (especially those who are new to the stock market) are distressed; before investing in a company’s stocks, at least must figure out several key things, that is, the minimum investment homework should include those. This is the purpose of this article. The most basic requirements described in the first and second paragraphs below will not take you much time. If you can’t pass the most basic requirements of the first and second paragraphs, or you don’t know (obviously hesitate to count) the answer of questions listed in first and second paragraphs. At this time, I advise most investors to start anew, it is not worth your time to invest anymore, hurry up and find another better investment target!
Figure out business background first
Investing in stocks is to bet our hard-earned money on unrelated organizations for many years. For our hard-earned money, of course, it is absolutely necessary to conduct a basic investigation on the companies we invest in:
What does the company rely on for its livelihood? What are the main businesses? How does the company make money? What’s the outlook? Who are the main customers? Who are the competitors? The most important thing is do you understand this business? If you still don’t understand within 5 minutes, then I advise you to stop here and find the next company you understand. For companies that you can’t understand in 5 minutes, there is a considerable chance that you still don’t understand in 5 years. It is impossible for you to make a lot of money to invest in a business that you do not understand!
Figure out if the company has achieved high competitiveness on the table, forget it if there is no outstanding competitiveness and high market share, don’t waste your time. If you really don’t know what a moat is? Please start from section 2-3 of my book “The Rules of Super Growth Stocks Investing”, and introduced more than ten kinds of common moats in enterprises, and interspersed with many business cases. You can start there.
What is the overall capability of the management team? What is the sacredness of the company’s chief executive officer, chief financial officer, and chairman of the board of directors? Are there any bad records? Is the founder still there? How many shares do these management have? You have to figure out these things before your step in.
At least you have to read the company’s annual report last year, the more years the better, to know the long-term trend. In the financial report, we must first figure out the following three topics:
What is the scale of corporate revenue? (The exact number is not important, but at least it is necessary to know whether the annual turnover is 500 million US dollars or 5 billion US dollars. This is a lot different!) What is the growth rate in the past five years and in the future? Again, the exact number is not important, but at least you must know exactly whether the annual revenue rate is 5%, 15%, or 30%. Investing in a company with an annual revenue rate of less than 5% is worse than buying bonds; just buy ETFs tracking broad market will be better. Is it going up or going uphill? How big is the potential market?
Does the company make money or lose money? This has to be figured out first. If can’t feed itself, can it feed investors?
How much money does the company owe? How much interest does the company has to pay every month? Can the company handle it? Is the free cash flow positive?
If you don’t know these terms or don’t know why I say so, you had better stop here and read section 4-2 of my book “The Rules of Super Growth Stocks Investing”.
If you have completed the first two parts of the most preliminary homework above, I have listed in the book “The Rules of Super Growth Stocks Investing” section 5-1, “Before valuation, use at least 5 questions to filter whether it is worth investing” , Please check one by one whether your investment goals are in line, and the point is whether you can answer them all at once.
Next, if you want to have a deeper understanding of the company you want to invest in, you can refer to my book “The Rules of Super Growth Stocks Investing“, section 4-1. The intermediate content I prepared for investors.
Basically, if you apply what we listed above to the company you plan to invest in, I believe you can confidently say that you have completed the “preliminary” (yes, it’s preliminary only, far from complete) analysis of this company. With these very basic backgrounds, you can then figure out the companies further you want to invest in according to your needs:
Is it suitable for you: Is it within your circle of competence? Have you had similar investment success (or failed) experience before?
Feet your principles?
Does it conform to your investment logic: This includes whether it is consistent with your investment principles, investment strategy, and investment portfolio.
Continue to study
There is no limit to learning, and the same is true for investment. The more time you invest in the company you invest in, the more you understand the company, the more you figure out, the more you can increase your confidence in holding investments, and the possibility of making big money will increase.
Buffett said that the more investors understand the company, the smaller the margin of safety required; of course, the confidence in holding shares will be stronger, and the probability of investment success will be relatively higher. If you want to invest successfully, there is no other way, you have to understand this company. For investment homework, I suggest you refer to my other blog post “Do investing homework by yourself: Necessary conditions for successful investment trilogy“.
In shareholder letter, Buffett talked about margin of safety: “We have to understand their competitive position. We have to understand the dynamics of the business.” and “You have to know what you’re doing and whether you’re within your circle of competence.”
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