How to do your own due diligence

Due diligence. Everyone says you should do it but no one tells you how. I have started compiling a list of due diligence questions to ask yourself before investing in equities. This is not an exhaustive list. I’ll add more as I think of them. (Please suggest any questions you feel are missing).

There are a lot of questions here and I don’t think it’s realistic to ask yourself each of these questions every single time you plan to trade. But these questions follow a progression and some of the answers might not change from one review to the next. The important thing is that you are aware of each answer and that it informs your decision.

(Note: There are many other questions to ask – industry specific questions, and questions about investments that aren’t equities – so this should be a starting point for your due diligence but it likely won’t be the end-point… especially if you are investing in businesses or bonds or FOREX or real estate.)

DUE DILIGENCE

  1. What are your lifestyle goals? (i.e. What current lifestyle goals – like travel – do you have right now? When do you plan to retire? What kind of lifestyle do you want to enjoy in retirement?).
  2. What are your financial goals? (i.e. How much money do you need to fund your lifestyle goals? How are you funding your current lifestyle? How do you intend to fund your future lifestyle? What other non-lifestyle expenses, such your child’s college education, do you also need to allow for?).
  3. How do your current and near-term finances contribute toward these lifestyle and financial goals?
  4. How do your long-term financial prospects look, especially in relation to your lifestyle and financial goals? (Consider job security, the likelihood of raises, etc.).
  5. How are you handling the shortfall between your goals and your finance? (Almost everyone will have a shortfall. There’s nothing wrong with that. Some potential solutions include reducing expenses, increasing income, and making investments in businesses, equities, and real estate… just to name a few options).
  6. What do you know about investing?
  7. What don’t you know about investing? (Seems like a strange question but spend some time on it! It’s a useful thing to think about).
  8. How would you describe your investing style? (i.e. Speculative? Value-based? Technical?).
  9. What are the rewards of your investing style?
  10. What are the risks of your investing style?
  11. Who are your key investment influencers? (i.e. Friends, the media, blogs, etc.).
  12. How do your investing preferences match and/or differ from your influencers’ styles?
  13. What investments do you currently have right now?
  14. What is the mix of investments? (i.e. How many equities? How many fixed income investments? What industries are they in? What is their weighting in your portfolio?).
  15. How much money do you need to gain in your portfolio between now and when you need the money?
  16. How much money are you willing to lose overall in your portfolio?
  17. How much money would you like to gain on a single investment?
  18. How much money are you willing to lose on a single investment?
  19. What are the tax ramifications if your portfolio achieves your goals?
  20. What are the tax ramifications if your portfolio declines?
  21. What are the tax ramifications if an individual stock achieves your goals?
  22. What are the tax ramifications if an individual stock declines?
  23. Does your current investment strategy reflect your preferred returns and your preferred risk level?
  24. How has your portfolio returned historically? (Consider overall, as well as year-over-year).
  25. Can you identify what you might have done differently to increase your gains and minimize your losses? (i.e. What clues did you miss? Was your timing off and, if so, why? Whose advice should you have paid attention to? Whose advice should you have ignored?).
  26. When it comes to investing, what would you say your biggest strengths are?
  27. What it comes to investing, what would you say your biggest weaknesses are?
  28. What type of investments do you prefer? (What size? What industry? Do your answers to this question match your answers to some of the earlier questions about the gains needed in a portfolio? Often they do not!).
  29. What investments are on your watchlist?
  30. Of the investments on your watchlist, why are they there? (Answer this question in two parts: 1. How did you first hear about them? 2. What raised your interest in them enough to put them on your watchlist?).
  31. What industries are represented in your watchlist?
  32. What industries are not represented in your watchlist?
  33. At what stage are the industries represented in your watchlist? (Beginning? Growing? Plateauing? Declining?).
  34. What are the strengths of the industries represented in your watchlist?
  35. What are the weaknesses of the industries represented in your watchlist?
  36. What are the opportunities of the industries represented in your watchlist?
  37. What are the threats of the industries represented in your watchlist?
  38. What companies are on your watchlist?
  39. Why are these companies on your watchlist and not other companies in the same industry?
  40. How long have you been watching them for?
  41. Based on their historical pricing, do they match your financial goals? (Although history is not a guarantee of future performance, it can help indicate what it could be like. But of course it’s not the full story).
  42. Do these companies match the level of risk you’re comfortable with?
  43. Of the companies on your watchlist right now, why are you doing due diligence on this specific one? (i.e. What has changed recently to compel you to look closer?).
  44. At what stage is your target company? (Beginning? Growing? Plateauing? Declining?)
  45. What contribution does your target company make to its industry (Pioneer? Innovator? Follower? Commoditizer?)
  46. What is the business model of your target company?
  47. Who are the ideal customers for each company in your watchlist? (Consider gender, level of income, education, geography, etc.)
  48. What is the value proposition of your target company? (i.e. What does the company sell? But more importantly, why do people buy this company’s products/services?)
  49. Who are this company’s main competitors?
  50. What are the main competitors’ contributions to the industry? (Pioneer? Innovator? Follower? Commoditizer?)
  51. What are the main competitor’s stages? (Beginning? Growing? Plateauing? Declining?)
  52. What are the main competitor’s business models?
  53. Who are the main competitors’ ideal customers?
  54. What are the main competitors’ value propositions?
  55. What are the strengths of your target company?
  56. What are the weaknesses of your target company?
  57. What are the opportunities of your target company?
  58. What are the threats of your target company?
  59. Who are the decision makers at your target company?
  60. What is the level of experience that each decision-maker brings to the company? (Consider both successes and failures, although remember that not all successes are necessarily good and not all failures are necessarily bad).
  61. How might politics improve or take away from the target company’s successes?
  62. How might the economy improve or take away from the target company’s success?
  63. How might social values improve or take away from the target company’s success?
  64. How might technology improve or take away from the target company’s success?
  65. Can the company pay its debt?
  66. How often does the company’s inventory turnover? How does it compare to others in the industry?
  67. How long does the company’s receivables stay on their books? How does it compare to others in the industry?
  68. What is the company’s debt-to-assets ratio? How does it compare to others in the industry?
  69. What does the company do with its extra money? (i.e. Does it pay dividends? Does it re-invest? If so, how much?)
  70. What is the company’s profit margin? How does it compare to others in the industry?
  71. What is the company’s return on assets? How does it compare to others in the industry?
  72. What is the company’s asset turnover? How does it compare to others in the industry?
  73. What is the company’s net earnings per common share? (This is the Earnings Per Share – EPS – ratio). How does it compare to others in the industry?
  74. How is the market valuing the company’s shares based on its EPS? (This is the Price-Earnings Ratio). How does it compare to others in the industry?
  75. What is the company’s return on common shareholder’s equity? How does it compare to others in the industry?
  76. What does the newsmedia say about your target company?
  77. What are analysts saying about your company?
  78. At what share price would you buy this company? (Why did you choose that price point?)
  79. How do you want to benefit from this company? (i.e. Dividends? Capital gains? Safety?)
  80. At what share price would you sell this company to achieve a desired gain? (Why did you choose that price point?)
  81. What happens if the share price declines? How long will you hold it? How will you know when to sell?
  82. What is the current price point of the target company’s stock?
  83. What is the 52-day high price and low price of the target company’s stock?
  84. Why has the stock price behaved the way it has in the last day, week, month, quarter, year, 5 years, and lifespan of the company? (“I don’t know” is not an acceptable answer here).
  85. At what volume does your target company trade?
  86. What external events impact your target company’s stock price and volume? (i.e. Some stocks are seasonal, other stocks are closely tied to a commodity, etc.)
  87. Why this stock now? (i.e. What happens if you wait a day or a week or a month? What happens if you buy a competitor instead?)

My latest project: Graphite Investing

I’ve been writing for the metals and mining industry for several years now. It started with some work I did for an oil and gas magazine back in 2002 or 2003. That morphed into an interest in the mining industry (especially junior resource companies) and I’ve done a ton of writing for the industry.

I have watched different resources rise and fall. Rare earths, for example, was one of those bubbles where I got access to early research and wrote about companies through their meteoric rise. The rare earths bubble burst but not before I watched a lot of people make a lot of money and I thought: “Damn. I knew it was happening but didn’t get my own portfolio in gear to do something about it.”

Although I am no expert in the resource industry, I do enjoy access to a lot of experts that most investors don’t have the time or connections to hear. This gives me an advantage and I promised myself that I would watch for the next resource opportunity and jump in when it arrives.

That opportunity (in my opinion) is here and it’s…

GRAPHITE MINERALS

When most people hear about graphite they think of the stuff in their pencil. But graphite is a resource that nearly EVERYONE relies on nearly every single day. And without getting into too many details, the supply/demand imbalance is acute. There is a HUGE and growing demand for graphite but the supply is not nearly sufficient to keep up with today’s demand (let alone the massive growth that is expected).

For this reason, I’m doing 2 things.

First, I’m investing in graphite. Yeah, the market is down and every publicly traded company’s stock price is seriously depressed but I think there is value and room for growth in some well-chosen graphite companies.

Second, I’ve started a website (GraphiteInvesting.com) to share with others the exciting story about graphite. It’s one of those minerals that few people realize just how essential it is. The website offers a free graphite investing e-course that describes the supply/demand imbalance and shows investors exactly why they should be paying attention to graphite.

If you have an interest in resources or in supply/demand imbalance opportunities, take the free course to learn more about graphite minerals.

(Note: I am not a licensed financial advisor and my bullishness on graphite is not a recommendation to buy. Everyone should always do their own due diligence first before making any portfolio decisions. See my disclaimer for more information).

What I’m working on this week (June 25 – 29)

After 5 weeks of grey skies and rain, the rain finally stopped and I spent a lot of the weekend outside — cutting the jungle that is my lawn and enjoying my backyard and visiting some friends.

This week I’m working on the following stuff…

  • Weekly commitment to clients: Writing articles for a mortgage broker and credit repair specialist.
  • Weekly commitment to clients: Writing blog posts for a stock pick website and a virtual real estate investor.
  • Working on my book.
  • Plus, all that work I’ve been doing on a real estate investing client’s book is done. We’re now in the wrapping-up-the-project stages, which includes stuff like finalizing what goes on the back cover, double-checking and triple-checking the Table of Contents, checking to make sure the links on the accompanying website are all working properly, etc.
  • I also started a side project; just something fun for my spare time. What does a financial writer do in his spare time? Read financial fiction, of course! So I created a Squidoo Lens where I will post reviews of the financial fiction books I read. (Plus I’ve read a bunch of financial fiction books in the past and now that I’ve started reviewing them, I need to go back and re-read them to post my reviews).

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My 7 favorite economic indicators

Economic indicators are tools used by investors and economists and governments and business owners to forecast how the economy is likely to change so they can plan accordingly.

I’ve always followed a couple of economic indicators but I recently picked up a book called The Wall Street Journal Guide To The 50 Economic Indicators That Really Matter by Simon Constable and Robert E. Wright because I wanted to find more to follow. It’s a great book and if you are ever interested in following economic indicators, you’ll find some in there!

Obviously, I can’t follow all 50 but reading the list helped me add to and change the list of economic indicators I’m following.

So here are my 7 favorite economic indicators:

CONSUMER CONFIDENCE INDICATOR

Uses surveys of households to measure how consumers feel about the economy. Although I find surveys to be generally unreliable, the consumer confidence indicator still offers a glimpse into the mind of the consumer, which is a pretty good starting point in any economic study.

HOME SALES

Okay, I’m cheating a little by using two economic indicators here instead of one – existing home sales and new home sales (see the press release on this page) – but I like to pay attention to both numbers.

FEDERAL FUNDS RATE

Banks lend each other money and the interest rate they charge each other is set by the Feds (sort-of; I’m simplifying a bit here). This interest rate is a frequently reported number (you’ll hear it on the news a lot) and it determines how much interest banks eventually charge its customers. Feds have traditionally used this number to help speed up or slow down the economy so the Federal Funds rate is a good measure of how the Feds see the economy and what they’re doing about it.

WEEKLY LEADING INDEX

I love this aggregate indicator that measures money supply, industrial price indexes, housing activity, jobs and labor indicators, and prices in the capital markets. Although you’ll need a membership to access some of the information, you can get a good synopsis of the Weekly Leading Index in their news center.

METAL INVENTORIES AND PRICING

Good economies require infrastructure and infrastructure requires metals (mostly copper but other stuff too). Based on the laws of supply and demand, remember that smaller inventories will drive prices higher and bigger inventories will usually drive prices lower. So tracking the inventories and prices of various metals is a great way to see whether economies are building infrastructure or not.

ARUOBA-DIEBOLD-SCOTTI BUSINESS CONDITIONS INDEX

The Philadelphia branch of the Federal Reserve publishes some great data on the economy, including the ADS Business Conditions Index. This aggregate indicator pulls together a lot of really useful economic information on unemployment, industrial production, personal income, sales, and GDP growth.

MISERY INDEX

The Misery Index is one of my favorite aggregate indicators. And it’s so simple, too; just add the inflation rate to the unemployment rate. And voila! You have two depressing numbers combined together in one.

… AND THE RUNNERS-UP

There is also a ton of great economic indicators here:

What I’m working on this week (June 18 – 22)

Last week was BUSY. It was the final big push on a real estate investing client’s book and a lot of other things were put on hold until that was done. (I still have a bit more to do on that project — one final read-through after the client signs off early this week — but I’m otherwise done).

So here’s what I’m working on this week:

  • Wrapping up a couple of ebooks for a real estate investing client, which are almost done but have been in a holding pattern
  • Writing an article for a debt repair expert
  • Will finally unveil a new project this week. It’s been a long time in the works
  • Oh, and this isn’t writing-related but my bathroom remodel is really moving forward!

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