What is due diligence?

Due diligence is the investigation and research that an investor should conduct prior to making an investment to determine whether that investment is right for them. This is true for any kind of investment — from stocks to real estate to businesses.

It’s technically a legal obligation for some investments but I would argue that it’s essential for any investment and, in fact, for any kind of agreement or acquisition at all, whether it’s your home or car, or even whether you’re thinking about entering into a relationship with someone. (In a way, it’s all an investment — your car is an investment of money into your ability to get around; your new relationship is an investment of time and energy into a friendship or romance).

Ultimately, due diligence should answer the question: “Is this investment right for me at this moment?

Good due diligence should first seek to understand that investment (or whatever) as thoroughly as possible. Then, it should consider what the investment means to you and your own goals and timeline.


To understand the investment, you need to explore it thoroughly. If it’s a stock, you need to study the stock itself, the industry, and market trends (and so much more. If it’s a real estate investment, you need to study the marketplace, the tenants and property management company, and the costs of maintaining a home in that area (and so much more). Even if it’s a potential romantic partner, you need to know what they’re hoping for a relationship, how they enjoy spending their time, whether the attraction is mutual, etc.


An investment, by its very nature, requires you to trade something of value for the potential of a return. That thing of value could be money, time, effort, or many other things. So it’s important that you know what is required of you (and whether you have that to give) and what you can expect. And perhaps most importantly, you need to decide whether the expected return is what you want. Many investors buy into something without really thinking about whether it’s right for them at this moment in time; they end up putting up too much value and receiving returns that they are disappointed with.


Regardless of your investment, it is impossible to perform too much due diligence. However, there comes a point when, practically speaking, you’ve done enough due diligence to move forward. I don’t think people have a problem with the idea of due diligence; rather, I think people do too little due diligence.

(Side note: As a real estate investor, I hear a lot of people say that they’re doing their due diligence but what they’re really doing is being stalled by fear and they are allowing that fear to catch them up into a loop of “analysis paralysis”. Strangely, I only see this in real estate and business investments — never in the stock market.)

Do not leave your due diligence in someone else’s hands. Sure, your financial advisor might help you perform some of your due diligence but don’t think of them as a replacement for due diligence! Do it yourself. Be thorough. Don’t rush.

Check out some of my other writing on due diligence including:

My 17 rules for investing (regardless of the investment)

I love investing. Stocks, real estate, businesses, you name it.

Here are the 17 rules I invest by.

  1. Every investment has a return: Either money or education.
  2. Don’t be an investor: Be an engineer. Don’t invest in anything you can’t control (and learn the levers that will provide a return).
  3. Redefine your idea of risk.
  4. It’s impossible to completely derisk any investment.
  5. Invest primarily for cash flow.
  6. Define why you are going to invest in something. (For me, I almost always build my investment decisions around what a business’ sales funnel looks like.)
  7. Define what would make you sell it: List specific triggers with all possible exits.
  8. Do your due diligence.
  9. Become an expert in just a few things: You can’t fully diversify so instead go the other way and become an expert on a few things.
  10. There is no such thing as passive income.
  11. Reinvest a portion of your income into more investments.
  12. Be courageous — things will fluctuate.
  13. If you want to scale, you need a system.
  14. Master yourself and get comfortable with uncertainty.
  15. Be a contrarian.
  16. Decision, action, and commitment are the 3 qualities of an investor.
  17. There is no perfect time or perfect investment. There is only “pretty good right now for me.”

Looking for private investors? Don’t make these mistakes!

Recently, I was approached by a company that was looking to drum up investors. Without giving away who the company is or what they do, I’ll briefly describe them in this way: They’re a non-publicly-traded B2B business with a 2-decade track record of success in an industry that is growing in demand. And they were looking for investors to help fund some upcoming initiatives. Cool. I like hearing about those kind of opportunities.

They got in touch to see if I was interested in investing with them. Their call was sort of a cold call (because I’d never heard from them before and this was the first time they were reaching out to me), although it technically wasn’t a cold call because we were connected through a social network and I had indicated that I was interested in hearing about investment opportunities.

On the call, they briefly introduced themselves and talked about the opportunity. The offer itself wasn’t clearly described on the phone. Was it an equity investment? Was it a bond? From what I could tell, I was supposed to give money to the company and they would use it to help their clients and then I would get my investment plus a return back. When I inquired further about what kind of offer it was, the caller wasn’t clear. Then she apologized because she is normally the one in the field but was making calls to investors that day.

Hmmm… a couple of red flags there but nothing that will turn me off yet. I can research my answers. So I asked if I could review any additional information to do my due diligence and they pointed me to their website.

And here’s where it fell apart:

  • Their website is very plain (which is fine) but it screams “old school”… in other words, it feels like a website from about 5 – 8 years ago. And the deeper I got into their site, the older it seemed. (One page looked like it was made in 1995).
  • Their website mixes content for clients and for investors. This is frustrating for both audiences — they need to divide up their content and make it obvious on the first page who should be sent where. (This is simply done with a button that says: “Clients click here” and “Investors click here”. It keeps the messages from getting mixed up and it helps with tracking what each audience does.
  • Their presentation page listed the available presentation but the password I was supposed to enter had the number “2009” into it. Does that mean the presentation is from 2009? I hope not because no investor should do due diligence based on information that is 4 years old.
  • Once I entered the password and clicked “view presentation”, a pop-up displayed that told me “this presentation is only viewable in Internet Explorer or Netscape Navigator”. Really? Hey, we live in a world where there are numerous browsers (many of which are more popular than the two listed above) and even if something doesn’t display 100% correctly in my browser, I’m fine with it. But to block investors out completely because they’re using Firefox or Safari or Chrome is a little crazy.
  • But I’m a determined person so I dug around on my computer until I found Internet Explorer and I dusted it off and opened it up, and went through the process to find their presentation and enter the password… only to be told that I had to download some program first.

That ended it for me. I have many investment opportunities available to me that promise equal or better returns than what this company was offering and it takes a lot less work to do my due diligence.

If you are a business looking for investors, here are some lessons for you from this experience:

  • Make sure your offer is clear. This company did okay talking about what they do and what my return was but they fell apart when talking about what structure the investment actually was.
  • Have dedicated fundraisers/investor relations people. When someone apologizes because they don’t normally make investor calls and are usually in the field, that’s sort of a red flag for me. I don’t mind that field people take the time to meet investors but in some cases (like when field people make cold calls) it smacks of desperation. At the very least, your investor relations people will at least have the skillset needed to raise funds.
  • Appear current: You don’t have to have the most cutting edge website but it should look like someone has touched it in the past 2-3 years.
  • Use a variety of distribution methods to get your information out there: There are many “platform-agnostic” ways of distributing information: On-page text, embedded video, PDF… just to name a few.

Investors want to invest money. That’s why they define themselves as investors. If you are a business who wants money from investors, you need to make it easy for investors to invest. Think of investors like customers — the easier you make it for a customer to buy, the more likely someone will buy from you.

“My stocks just dropped… should I sell?”

Stock prices go up and they go down. Since 2008, stock prices have fluctuated (sometimes wildly) and investors don’t always know what to do.

The expert advice out there is mixed: Some wisdom says “Cut your losers and let your winners soar”, meaning that you should only hold stocks that are generally going up. Other wisdom says that the best time to invest is when other people are running scared from a stock, meaning that you want stocks that other people see as losers (i.e. the stocks that are down).

So what should you do if the prices of the stocks in your portfolio drop? Cut them? Hold them? Buy more?

Here’s what I think…

Assuming that you did sufficient due diligence when you first bought the stock, then identifying the changes in the market’s valuation of the stock as well as the overall market sentiment can reveal what you should do.

  1. Dig into the news about the stock. Ask yourself this question: “Why has the market changed its mind about the value of this stock?” Figure out what has changed: What news item or piece of information has altered the trajectory of the price?
  2. Take a step back and look at the wider picture — the industry and the market as a whole. What’s happening at the bigger level that might have an influence on this stock?

Then use a chart like this as a guide to know what to do with the information you’ve discovered above…

  • If information about the company of the underlying stock has remained the same and if the market is unchanged (upper left quadrant), then this price drop could be something else, such a temporary sell-off (i.e. for tax loss purposes or institutional investor portfolio rebalancing). In those cases, I prefer to double-down and buy more.
  • If the information about the company of the underlying stock has changed but the market remains unchanged (upper right quadrant), then I need to take a closer look at the stock — to revisit whether I think the fundamentals are still true and to sell if they are no longer true.
  • If the company hasn’t changed but the market has (lower left quadrant), then I’ll revisit the stock but in general have tended to hold my stocks during this time. Market corrections are cyclical and I’m not going to worry about them too much.
  • If the company has changed and the market has changed (lower right quadrant), then it is very likely time to sell because my entire profit thesis when I first bought the stock is no longer relevant.

This chart isn’t ever going to be perfect for everyone — we each have different investing goals and time horizons — but when you open up your portfolio and see that one or more of your stocks have fallen, a tool like this is a useful way to take a step back and apply a layer of analysis to the situation so that you don’t simply sell in an uneducated knee-jerk reaction.

The irony of the conservative investor

In an episode of West Wing (still one of my favorite shows!), two characters are talking about PBS television and one of them says that more people claim to watch PBS than actually do watch PBS. The reason is: People like to think of themselves as being PBS watchers even if they aren’t.

Likewise, many philosophers and gurus have shared the following wisdom (which I’m collectively paraphrasing): You can tell a lot about a person, not by what they say but by what they actually do.

With this in mind, I want to talk about the irony of the conservative investor.

Many people who claim to be conservative investors are not really conservative investors. They’re just ignorant aggressive investors.

My parents would describe themselves as conservative investors, as would several of my friends. But when we talk about their actual investment practices, the situation is VERY different. And they are not alone. I saw this when I was a stockbroker, and I still see it today: If you were to ask people if they were conservative investors, you would get a lot people saying they are because they think of themselves as being careful and risk averse.

But they only THINK they are conservative investors… they really aren’t. They believe they have carefully invested their money into quality stocks that are widely diversified, and that their investments are truly safe (in spite of the fluctuations of the market).

But my experience with investors tells me something completely different.

Investors put some of their money into mutual funds based on advice from others or on past performance (in spite of the disclaimers). And, they put some of their money into equities but they chose those equities based on over-the-fence hearsay from their neighbors and friends… or because they spotted the name of the stock on the 6 o’clock news or on a magazine cover.

Ask any advisor and they will be able to tell you a story that is similar to this one: They’ve been advising a client to go into a blue chip stock for a while but the client is reluctant because they feel the stock market is too risky. But then those same “conservative” clients call up the broker because their neighbor knows someone who is suggesting they jump into a penny stock… No due diligence; no second-guessing; no analysis against portfolio goals.

I even had one brand new client show up at my office once and, even though she described herself as a conservative investor, randomly point to a screen of stocks and ask to put her entire available capital into ‘that’ one… just because everyone else was investing in stuff and she wasn’t.

Many conservative investors are not conservative at all. Part of the problem is simply not knowing how to invest — they think they can diversify themselves out of all market risk. But part of the problem is that they aren’t the conservative investor they think they are — they don’t want to do due diligence and they jump on whatever hot stock there is right now.

What’s the solution? I’m not sure. Most good stockbrokers and investment professionals will talk their clients down from the ledge of aggressive investing but wouldn’t it be great if investors were shown HOW to be conservative investors before they picked up the phone to call their broker? I think education is the only answer.

I was recently talking to one investor who was frustrated by the market and wanted to put all her money under her mattress… and just didn’t “get” what I was saying when I tried to explain about the costs of inflation. And another investor asks me for stock ideas but he only wants ideas of stocks that go up… as if I would know that ahead of time. (Disclaimer: I don’t give stock ideas at all, but people ask me for them all the time, which should be a sign of a non-conservative investor!)

Perhaps what needs to happen is that advisors and financial professionals need to draw more of a connection between the claim of what it means to be a conservative investor and the actual practice of being a conservative investor. When someone states on their investor application form, for example, that they are conservative, it should put them into an educational program where they are equipped to be conservative. They should be able to know the qualities or characteristics of a conservative investor and be equipped to make decisions through the lens of a conservative investor. And there should be a more difficult process to switch from conservative investing to aggressive investing.

Perhaps stockbrokers need to share the due diligence process with their clients (instead of just having a conservative client show up and say: “Put some of my money into Bre-X”.

A seminar series about conservative investing might help people to understand what it means to be conservative.

Ideally, a conservative investor who gets a great stock idea (from their completely unqualified-to-give-advice friend) should have an easy step-by-step method to do their own initial due diligence before they call up their broker and ask to put some of their money into the stock.

There are many people out there who claim to be conservative investors but their investing practice suggests something entirely different. I think it needs to be fixed.