Questions to ask before buying a stock




1. Am I comfortable to hold my position for at least 20 years?

        When buying a stock you need to have a long perspective. You should think as not just buying a stock but as a businessman who is buying the whole business. That way of thinking will force you to think in more details; deep dive into financial reports; ask more questions; analyze more; learn things like who is running the business; what are the growth prospects; who are the competitors; etc.

2. What are the risk of the business?

        Before buying a stock you could prepare a list of risks which the business could face. And when some of these risk comes to the surface - you need to have a plan for action and some prospective about what will happen with the company. Those kind of events should not surprise you.

3. Does it have growth perspective?

        We buy a business with one thing in mind - to make money. For a stock to perform well it has to increase its profits. There are many companies which just go up and down for many years, they do not go bust but they do not outperform either. The business you are investing in should have clear growth perspective, otherwise it does not worth taking the risk.

4. Is the business in a good sector?

        If you look at the business which outperform the market, you will see that they operate in a good sector. It is extremely rare to see a business growing very fast and at the same time operates in a bad sector. So you should try to pick businesses which are operating in profitable sectors and if possible are leaders there.

5. Is it managed well? Are you comfortable with the current management?

        Even a very good business could be ruined by a bad management. The people who are managing the business are critical for the performance of the business. Mostly the businesses which are managed by their founders are likely to perform well or the ones who are run very professionally for many years. It is very tough to rate the management, you could try to rate it looking at things like: debt management; new investments; whether they execute the things they had promised to do in the past;etc.

6. What has to happen for you to sold your shares?

        You should have a list of future expected events which if happen, you should sell all or part of your shares. That bad events should not surprise you. You need to have clear plan what to do when something happen.

7. Do you have clear notes for the future which will provide you a feedback that everything is going as planned?

        Good and growing companies almost always provide some guidelines for the future of the company. You need to have a list of them and regularly check whether all is going as planned.

8. How you see your analyses?
        Since we can not know everything and can not make a perfect plan, especially when it comes to guessing the future of a complex animal as a business, it is good to have in mind that you could not estimate and know everything. It is good to put a rate on your analysis, be humble, I have seen many investors going broke because of overconfidence.


9. Who is owning the business?
        It is important to know who is owning the business. The best is the business to be owned by its founders and they to be to biggest owners. You need the be careful if the owners are selling their shares. If the owners or the people in the management are buying stocks, it is very good sign for the business.

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