Here’s a checklist of 75 questions you should ask yourself, to make sure you’re buying for the right reasons.
So, what’s the need for all of these questions? And why so many of them?
Asking yourself all of these questions allows you to get into the investment ring with your eyes wide open. Often times, many investors who lost “more than they expected” did so because they didn’t expect enough. They didn’t cover all their bases, and prepare to a proper level.
When your awareness of the truly important stuff is limited, your risks increase. Suddenly, unexpected events start blindsiding you left, right and center. If you look at boxers for example, they need to be aware of every little detail regarding their opponents, months before the fight date, In doing so, they minimize the risks of an unexpected knockout, and maximize their chances of winning. The same goes for investing. Over-preparation matters.
“OK, but…why so many!?
Well, it’s because the more sensible questions you ask yourself, the more ground you cover when it comes to your buying decisions. By lowering your risks for buying the wrong stock, you can strengthen your potential investment positions.
Lastly, questions are the signs of an active mind. By answering these “buying stocks for dummies” questions, you stimulate your stock-buying mind, the benefits of which go way beyond these 75 questions. Don’t be surprised to find that while you ask yourself these questions, you’ll realize even more things about your potential stock investments that weren’t even covered here, but can potentially help you find the right stocks at the right time.
In each case, it’s a simple “yes or no” answer. First we’ll look at some questions you should be able to answer with a confident “yes,” and then we’ll look at some others that should provoke a definite “no.” These of course do not apply to every investment strategy, but should be used as a great reference for what to ask yourself when making stock picks.
Have you heard of this company before today?
Can you explain what the company does in one sentence?
Do you understand exactly how it makes money?
Do you understand the risks of the investment?
Have you analyzed the company’s earnings history?
Did you understand it?
Do you have a clear plan of how long to hold, and when to sell?
Have you worked out the value of the company?
Do you know how the company is likely to fare if the economy takes a turn for the worse?
Have you analyzed the firm’s main competitors?
Is the business model sustainable over the long term?
Does it have accelerating earnings growth?
If not, is there a clear expectation for earnings to grow in the near future?
Does it have strong operating cash flow?
Is it easily making enough money to cover its debt, even if it suffered a downturn in fortunes?
Do the CEO and other key executives have strong track records?
Do you know what the analysts’ recommendations are for this stock?
If you’re going against the analysts’ recommendations, are you certain you’ve done more research than them and spotted something they’ve all missed?
Does the company have a track record of at least meeting—and preferably beating—earnings estimates?
Does the company have a strong balance sheet, with plenty of cash and not too much debt?
If the stock market closed for the next ten years, would you be comfortable holding this stock the whole time?
Is the company’s P/E (or other valuation metric of your choice) reasonable compared to competitors, and compared to its own historical numbers?
If it’s highly valued, are you clear on exactly why it deserves that high valuation?
Do you have a target price at which you’ll sell?
Are you so confident in your research that, if the price dropped 20% tomorrow, you’d simply view it as a great opportunity to buy more?
Are the company’s financials fairly consistent year by year?
Have you paid attention to your emotions?
Are you investing money you can afford to lose?
Is this investment a relatively small part of a diversified portfolio?
Have you researched dozens of other stocks, to make sure that this is really the one you need to be investing your money in?
Does the company provide consistently high returns on equity?
Do you have a “margin for error” built into your forecasts, so that even if things don’t turn out as planned, you should still do OK?
If the company is selling for a bargain price, do you understand why?
Do you have specific investment criteria?
Does this stock meet all of them?
Are you comfortable with the overall stock market’s valuation right now?
If not, are you confident that this particular stock can prosper even in a declining market?
Have you invested in stocks before, at least in a stock market simulator if not for real?
Do you understand exactly why you’ve either made or lost money on past investments, and are you applying the lessons to this stock purchase?
Are you clear on what investment strategy you’re using, and why you’re using it?
Does this investment complement the other stocks in your portfolio, giving you a good mix of different sizes and sectors?
Have you considered everything that could derail the company’s plans, as well as the possibility that they’ll be derailed by something nobody’s thought of yet?
Does the company have diversified income streams, so that if one product or service suffers, it can still survive on the others?
Would you recommend this stock to your friends and family without hesitation?
Have you combed through all the company presentations and shareholder letters in the “investor relations” section of the website?
Have you treated the contents of those presentations with the appropriate degree of skepticism?
Have you conducted broad web searches to see what people are saying about the company, what it’s reputation is like?
Have you detached yourself from media hype, and made an independent, fact-based decision?
Do you recognize your own limitations?
Are you OK with the fact that, even if you’ve done all your homework, the stock could still tank for reasons outside your control?
Are you buying this stock purely on someone else’s recommendation?
Are you planning to buy first, and look into the numbers later on?
Are you depending on this stock to perform spectacularly well in the short term to pay for your kids’ college education?
Are you investing because your friends have been boasting about the money they’ve made in the stock market, and you want to join in?
Do you suspect the stock is overvalued, but figure that you’ll ride the wave for a little while and get out before it crashes?
Does this investment account for more than 25% of your overall portfolio?
Do you think that because you know the company well and like the way it does business, you don’t have to research the financials?
Do you think that a low stock price means the stock is cheap?
Are you buying because the stock market’s been on a tear and you feel as if you’ve missed out?
Did you pick this stock purely because it’s in a “hot” sector?
Does the company have a lot of debt?
Does this company’s entire business model rely on it discovering the cure for cancer?
Do the financial statements include any “creative” accounting practices?
Is the company dependent on securing additional capital in order to stay in business?
Are you afraid that if you don’t move quickly, you’ll miss the chance of investing?
Does the company swing wildly between profit and loss from year to year?
Is there a large difference between the “bid” and “ask” prices (i.e. the buying and selling prices)?
Is it possible that you’ll struggle to sell the stock when the time comes?
Are you buying because you want to support your favorite brand?
Does the company have any major outstanding legal action against it?
Does the overall market seem highly valued right now?
Are you investing money you might need access to in the next few years?
Are you buying this stock because you think the price has dropped so much that it can’t drop any further?
Are you buying this stock because you think the price has risen so much that it must keep on rising?
Do you see this as a way to “get rich quick”?
If you can answer all of these questions with a simple yes or no, you should be in a strong position to invest. There’s no guarantee that you’ll make money, but at least you’ll know that you gave yourself the best possible chance.
And remember that the questioning doesn’t end when you click “Buy.” You should keep monitoring your investments and questioning yourself on a regular basis, to make sure that your original rationale still holds up.