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?)

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