Within the investment research process you have to turn over a lot of stones to uncover as much as you can about the company you are interested in owning. Every piece of information matters. As it is hard to discover everything, leaving one stone uncovered can fail to reveal the one piece of the puzzle that could tie the idea together or unveil a potential threat that could result in disaster.
The investment research process usually starts with an idea or trigger. A solid investment process peels back the layers of a business to discover the businesses inner workings. The first layers usually start with recent news or articles posted on the internet discussing the business. The news pieces or internet articles usually contain bits or data interwoven with personal opinions to create a story of positive or negative vibes that can lead to other bits of information.
Investment Research Layers
The second layer of investment research usually involves digging through the company website and checking out their presentations, services, products, personnel, financial results, and press releases. This layer of understanding the businesses full product capabilities and services will confirm or dispel your idea of whether this idea confirms your visions of potential investment opportunity.
The first two layers of the peeled back business information are the easy parts of investment research. Articles and presentations are normally presented and formatted to capture the reader or viewer in an enjoyable way. Stopping the research process at this point only uncovers a small aspect of data or information and can set an investor up for trouble.
The next layer of investing, for which I would suspect the minority of investors choose, is reviewing the quarterly earnings calls with management, and digging through stock recommendation sites, or reading brokerage analyst write ups. Most stock recommendation websites have annual fees as a part of their services, and there can be multiple opinions that vary due to the different methods of investing.
Brokerage analysts write ups may have bias. Brokerages try to stay on the good side of a business’s management if they want to be considered as a candidate for the next round of the company’s potential fund raising. There’s too much money to be lost on the offerings side of new stock or fixed income for an investment firm. This is why you rarely see the word “sell” used in brokerage recommendations.
The Deep Layers
The most important layer of investment research deals with reading SEC government filed reports, visiting the companies stores or locations, and asking questions of others that deal with or use the businesses services or products. Often I find information that isn’t anywhere else that is of importance in this step.
As an example I recently came upon a business that was dealing with an EPA clean up where the estimated cost could exceed $1 billion dollars. The company was one of many companies mentioned as responsible in the EPA report. Something like this warrants serious investigation to get clarity on what it means to the business. The cost to the company could be minimal or it could well exceed their profitability for years.
Getting through layers of investment research is time consuming. Even if you do a thorough research it doesn’t mean you will catch everything as a business is a constantly changing entity, since it involves people. Survival of the business is the most important element to management and investors. If the business fails they all lose their jobs and income, and investors lose their investments. This means that businesses have to feed themselves with revenue and continually find new sources of revenue as when their revenue source is abundant you can bet other competitors will show up fast.
A thorough investment process will help you to be successful more often with your choices, but be prepared it is time consuming. I always consider what it will take to own a business outright as it’s my money that is involved. It makes the choices harder, but it also pushes it further away from it becoming gambling with unknown odds.
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