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.

HOW TO UNDERSTAND THE INVESTMENT

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.

HOW TO CONSIDER WHAT THIS INVESTMENT MEANS TO YOU

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.

DO YOUR DUE DILIGENCE — ALWAYS

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.”

Aaron Hoos’ weekly reading list: ‘Blackberry, Twitter, and ShamWow’ edition

Aaron Hoos: Weekly reading list

There seemed to be way more to read this week than other weeks. Funny how that works. Here are some of the things I’ve been reading:.

  • Blackberry waves the white flag. How can you not read about Blackberry this week? haha. This article from Salon (and this article from Forbes) nicely sums up the fall. And that’s pretty much what Blackberry is going to be known for unless it can pull some kind of magical rabbit out of a magical hat. Which isn’t going to happen. The company is now just desperately looking for some kind of exit, in my opinion, and it will struggle for a while until it can find an exit. But what exits are possible? No one is holding their breath.
  • What’s next for Twitter besides the Twitter IPO?. This is a very compelling article that describes how Twitter is evolving and where it may be headed. The article’s writer, Christopher S. Penn, does a good job of discussing how Twitter will change and what it means for marketing departments. Buried deep within his article is a reference to Twitter TV which I wonder if it could be the Next Big Thing for Twitter. I might blog more about this topic in the future.
  • Will Emmy winners be thanking Twitter?. While we’re on the subject of Twitter, here’s another article I read about how some shows have a huge Twitter following and the possible influence that might have on Emmy awards. There isn’t a direct connection but Twitter is a powerful way to build momentum for a show (can anyway say Sharknado?), interact with audiences, and get the pulse of viewers. This is one of those articles that, after reading, made me sit back and contemplate the impact that Twitter could have on marketers who really rock it out on Twitter.
  • ShamWow guy stages a comeback. I don’t know why I’m so fascinated with the ShamWow guy but I am. I think I’m fascinated by pitchmen (pitchpeople?) in general but the ShamWow guy’s attitude and style win me out over some of those other pitchmen’s shout-at-the-camera methods. I read this article earlier this week and, in fact, it inspired its own blog post — The ShamWow business model. And way back in 2010 I wrote 10 products that the ShamWow guy should sell in 2010.

Forbes interview

Woohoo! I was interviewed by Forbes. The interview has been posted on their blog.

Before you go there, here’s the backstory:

Almost 20 years ago (yes, this backstory stretches back that far), I was reading in a consumer finance magazine about investing and I came across an article about a category of stocks called “sin stocks”. Sin stocks are a group of stocks related to a social taboo or controversy, and they include companies that deal in tobacco, alcohol, gambling, firearms, and more.

The concept fascinated me so much that I tore the article out of the magazine and put it into a file of magazine articles that I keep and read from time to time. That article in that file moved from house to house as I went to college, got married, started my first business, failed at that business, got a job, became a stockbroker, started my second business, and got my Masters degree. I re-read the article from time to time and paid attention to sin stocks as a category through it all.

Just last summer I pulled that article out of the file, re-read it, and then threw the article and the file out (because who keeps magazine articles in a file anymore, right?). And then I started Sin Stocks Report.

I started Sin Stocks Report because I felt that no one else was covering sin stocks in the way they needed to be covered. Yes, people would write an article now and then and post it on a site like SeekingAlpha or MoneyShow or something — but nothing with consistency.

Starting Sin Stocks Report was a bit of a gamble. The reason is: I don’t necessarily endorse the products and services that sin stocks sell. But I started the site anyway because I see myself as kind of a reporter writing about topics and you don’t always get to write about topics that you agree with.

Since starting the site, I’ve had some (mercifully) good feedback, including opportunities to do interviews and provide market commentaries. I’ve turned them all down because this is a hobby and I don’t really want to become “the guy” who covers vice. (And if you knew me in person you’d know that I’m actually kind of the opposite — I don’t smoke, I barely drink, I rarely go to casinos, etc. I eat pretty healthy; I workout everyday; I read a lot; I go to the opera). I see myself as a reporter of sin stocks.

But when Susannah Breslin of Forbes contacted me for an interview, I couldn’t turn it down. (Well, I almost did but it was Forbes). She did the interview (more on that in a future post) and then posted it at Forbes.com. You can check out her interview here: Looking for Mr. Sin Stock.

forbes-screenshot

Why do sin stocks fascinate me so much? It’s partly because I’m a finance nerd and I love stocks. It’s partly because I’m a writer and I want to cover a topic that other people aren’t covering adequately.

But it’s mostly because sin stocks are a glimpse into human nature. The “sin” in “sin stocks” isn’t necessarily a religious judgment (which is sometimes why they’re called “vice stocks” instead). Rather the label “sin stocks” is a glimpse into our social values — the things that define us and the things that we implicitly label as acceptable-enough-to-be-legal-but-unacceptable-enough-to-be-aggressively-legislated.

As Susannah put it in our interview, “sin stocks are a petri dish of the human condition”. I couldn’t have said it better myself.

Aaron Hoos’ weekly reading list: ‘Government money, dumb money, and too much money’ edition

Aaron Hoos: Weekly reading list

I’ve had an interesting relationship to money in my life: Growing up, my parents didn’t have a lot of it so I really noticed a divide between the haves and the have-nots, and definitely felt that I was firmly among the have-nots. I developed the idea that I’d never achieve “have” status. When I was a stockbroker, the guy who trained me said: “Money isn’t the most important thing in the world. It’s second to oxygen” — a quote that I have pondered and debated in my mind since hearing it. It reveals a humorous truth and a dark side as well. Today, I work with people who make a ton of money. I make more than I need yet I still have a weird “have-not” relationship with money. It’s weird. Okay, psychologists, you can start analyzing.

Here’s some money-related stuff I’ve been reading this week: