Some Standard Questions to ask Before Investing in company

Investing is not complicated, it is very simple; however not easy. First and foremost, what you need to understand is the business that the company is in. 
1. Do you know exactly what it is that they are doing? For instance, Warren Buffett, CEO of Berkshire Hathaway, does not invest in the industries he does not understand such as technology. He invests in furniture stores, jewelry, railroads, food and beverage industry and so on.
2. Next question is if a company has a “moat.” A moat is a long-term competitive advantage that protects companies from competition as moats protect castles from enemies. For instance, one of Buffett’s biggest companies is GEICO. Its moat is an extremely low-cost operation because of the absence of insurance agents. Direct marketing and sales allows GEICO to save on agents and spend generously on advertising. When times are bad in the insurance industry, which is cyclical. There are bad times time to time, and GEICO’s low cost operation has an advantage over others. The moat in case of Coca-Cola is a dominant market position with a unique brand. The moat in case of railroad is barrier to entrance. No one starts new railroad companies and there are couple of them, meaning oligopoly.
3. How likely is the industry in which a company operates to change over time? Invest in the lack of change, not in change. For instance, ask yourself if thinking about gums, are people 20 years from now are going to chew gyms differently? The answer is no. Are people going to need soft-drinks such as Coke? Answer is yes. The same goes for insurance, jewelry, and so on. Change in these industries is very slow compared to one in technology. Therefore it is easier to predict their earnings. In technology, there are huge possible gains as opposed the industries listed above because of the ever-changing landscape. However, one should prefer certain good outcome over hopeful great one. Buffett sure does. 
4. Make market your friend. Invest when prices are low. That is the hardest part of all in investing, to be emotionally intelligent. When a price is low, that is when you should invest. Times such as 2008 and 2009 for instance. Price is what you pay, value is what you get. Berkshire made bigger acquisitions during the Great Recession than any other time. 
5. Does the company have shareholder oriented management? Are they thinking like owners? What is their record of capital allocation? How does per-share intrinsic value has improved over the last ten years? Are they trying to enlarge their domains or enhance the shareholder value? 
There are many more questions to ask, these are just the basics. If you want to learn about investing, you need to read a lot. Read The Intelligent Investor by Ben Graham, read Letters to Shareholders by Warren Buffett, available for free online as well as a book version on Amazon. Buffett’s advice to is to read 500 pages a day to get smarter and more intelligent. Knowledge is like a compound interest as he says. Even if you are not planning to have a career in finance or investments, reading above mentioned books and many others regarding the topic will make you smarter and better at whatever you do. Best of luck!



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s