Here are 9 questions to ask before buying a stock.
- What is good about this company?
- What are the risks associated with this company?
- What is the likelihood of each risk coming true? If so, what are the consequences of it?
- What is the company doing to mitigate these risks?
- What does the future of the company look like?
- Does the management possess integrity, honesty and intelligence?
- What is the intrinsic value of this company?
- How much of a discount is the company currently selling for?
- How do I know I am correct in my assessment? What evidence do I have to backup my answers?
The answers to questions 1 through 6 can be found in the annual reports. You should probably read annual reports of the past 3 to 5 years to get a clearer picture of the company. It will tell you a lot about the future of the company, risks associated, and management’s ability.
Answers to questions 7 and 8 will require you to do some math. There is no one way to calculate a company’s intrinsic value. Googling “How to calculate a company’s intrinsic value” will give you plenty of ideas. Research a few, and use multiple methods to see if the answer is within the same ballpark.
In my experience there are three reasons people will lose money in the stock market.
- Lack of extensive research
- Gut feeling so strong investor loses any objectivity
- Arrogance – It is correct because I say so.
While questions 1-8 are about extensive research, question 9 is about eliminating arrogance and gut feelings you have about a stock. It’s about ensuring you have actual evidence to backup your gut feelings, and make an informed decision.
Hope this helps.