Due Diligence For Long Term Investing and Trading Success

Well executed due diligence conducted before investing is the foundation on which everything else you do stands.  It is the process by which you narrow down the choices on your watchlist.  It is the process by which you do what you can not to be the victim of  fraud, ala Madoff or any of the other thousands of ways people lie to get your money.

There are lots of ways to make money in the world of investing and trading over the long haul when you figure out where you have an edge and you stick with taking advantage of it.  You don’t need to win on every trade and you don’t need to try to make your fortune on any one trade.  What you do need to do is manage your trading so that you limit the risk of losing all of your money in any particular trade as well as spreading out the risks you are taking over a number of ideas so that if any one of them is a total loss you still have money to stay in business.

Too slow?  Boring?  Want to “swing for the fences”,  “throw the hail Mary”,  “put it all on one number”?  That is gambling.  It’s your money and you are free to do with it what you will,  but here’s a tip:  if you do your gambling in Las Vegas, you may get free drinks.  In stock, commodity, Forex, and other such markets, when you’ve lost your money all you’ll hear is someone saying “NEXT”!  What I am trying to get at here is that gambling is fine when you realize that’s what you’re doing.

 

How can you do that?  Well, it does take some time and effort, but not so much as you might fear.

Having some structure to guide your research can make all the difference.  The old standard for this thought process is the SWOT analysis .  The letters stand for –

  • Strengths –  What does this company have going for it from your perspective?    Is it well run?  Does it have a strong history of earnings increases?  Does it control a particular sector?  Is it a small company that institutions can’t invest in?  Is its price unreasonably low for some reason not associated with bad results or internal flaws?  Does it stack up well against its competitors?  and so on.
  • Weaknesses –  What is working against it?  Is it in a stagnant industry?  Does it face strong competition in key areas? Does it have too much debt relative to similar companies?  Is it subject to heavy government regulations?  Are there recent unexplained changes in the management team?  Has it changed auditors recently?  Does it have enough cash to do business?  and on and on.
  • Opportunities – What do you see in its future?  Has it got a patent on a popular product?  Is it’s field just opening up?  Is it growing to the point of perhaps beginning to be followed by analysts for the first time?  It it set up in a newly booming geographic region?  etc.
  • Threats – What dangers does it face? What could change that would make its position worse?  Are competitors challenging its key product?  Are there rumblings about nationalization of its foreign properties?  Is there a major court case coming up?  Do it rely heavily on a charismatic CEO?  Does hurricane season affect it?  Whatever you can think of,  put it on your work sheet.)

There is no right answer to this kind of research.  You will probably find some article, news item, financial report, or analysis that could be taken either as good or bad on just about every point on the worksheet.  What you will find is how you feel about all the facts and information you have collected, net positive or net negative.

When you do decide to enter a trade, the analysis will be your format for the ongoing due diligence as whether this is an investment to stay in or not.  You will be much quicker to notice if a positive is deteriorating, a weakness getting worse, an opportunity not panning out, or a threat coming to be, so that you know when to get out of a bad situation and move on.

In each phase of the investment, this is the way of thinking that lets you move forward with your eyes open, actively managing your decision making process from entry to exit.