Questions To Ask Before You Invest

Questions to ask before you invest or buy stocks, and why it’s like shopping for a printer. A guest post courtesy of Mr. Moneybags.

For one reason or another, I recently found myself in desperate need of a new printer. So, off I went into the treacherous realm that they commonly refer to as Staples. While the overzealous salesperson interrogated me as to my printing needs (over a smoldering pit of lava, if I remember correctly), I couldn’t quite help but think that this whole process wasn’t too different from investing in stocks.

Let’s see how both are similar, shall we?

The Printer-Buying Process

What are you going to use the printer for? How many pages do you typically print per month? Do you need to do double-sided printing? Do you need to print in both color and black and white? Got both your kidneys? Can we have one?

Those are just some of the questions that I was asked. And they were really good questions. The salesperson was getting to know me, my needs and my unnecessary wants and was going to present a solution based on this information.

Investing should work the exact same way. You have to ask yourself very similar questions. The more questions you ask, the better. For instance, had the salesperson not asked me over 14,006 questions, he would not have been able to sell me a $500 behemoth that does everything but skin a chicken (that feature was not yet available). And I’ll have you know I have never been happier with a purchase in my life before.

And to be equally happy with the results of your investments, you will have to do a similar form of due diligence. If you don’t ask yourself enough questions regarding whatever it is that you’re investing in, don’t expect to be too ecstatic with your decision. The more thorough you are, the better.

So let’s take a look at some good questions you should ask yourself before investing.

Investing Questions Everyone Should Ask

The questions you ask will highly depend on the type of investor you are. However, there will always be those few questions that any investor must ask, regardless of their orientation. They mainly have to do with actually understanding what it is that you’re going to be putting your money in. If you’re investing in a stock, ask the following:

1. What does the company do? How does it make its money?
2. What industry is it operating in? Who are its customers?
3. What do the company’s customers think of it? Are they flocking to every new product like wild chipmunks (see: Apple or AAPL) or egging the CEO’s home every Thursday evening (see: Comcast)?
4. Does the stock have a small market capitalization (see: Buffalo Wild Wings, Playboy Enterprises)? Medium (Underarmor, Sirius XM Radio)? Large (Microsoft, General Electric)?

You can effortlessly answer any of these questions just by doing a quick Google search. Or walk around the mall and see how many people are buying things from whatever company piqued your interest. Or, hell, just give the company’s Investor Relations department a call and have a quick chat with them — they’ll happily answer all your questions.

My Own Investment Questions

Then you’re going to want to get more specific. And this is where the questions you ask will start to differ from other investors. Some of my own queries reflect the investment strategies inspired by Warren Buffett and Peter Lynch. Personally, I like to invest in stocks that will make me a whole lot of money. That’s why I like to invest in companies that are consistently growing their revenues and earnings, have industry leading operating margins and little-to-no debt (among other criteria). This is also the investment style that I emphasize in my book. Here are some of the questions that I ask:

1. Is the company consistently growing its sales year after year for the last 5 years? Same with earnings?
2. Is the operating profit margin above 15% and is it growing year after year? Is it doing better than its competitors?
3. Is the company relying on debt to finance its growth? Does it have enough cash stores to pay off all or most of its debts?
4. Is inventory turnover high? Are inventories growing too fast or is there not enough to meet demand?

These are all inquiries that can be answered within 5 minutes just by looking at a company’s income statement and balance sheet. And it shouldn’t take you much longer once you get enough practice.

Questions That Value Investors May Want To Bring Up

Do you like to buy things that are worth $1 for 70, 50 or even 20 cents? And are you willing to wait to sink your hands on such a deal? Then you’re probably a value investor, as are many, many other people. Here are some questions you would ask before investing.

1. How much is the stock worth? What is its current price? (To get a discount, you’ll obviously want to buy stock at a price that is below its true value).
2. Is the stock trading at a low price because investors are stupid and shunned it, thereby causing the undervaluation, or because there is something fundamentally wrong with the company?
3. Am I willing to wait enough time for the stock to grow to or beyond its real worth? Is the stock paying out dividends to make up for all this time I spend waiting?

Summing It All Up

I know all these questions may seem like a whole lot of work, but you won’t be complaining once you find yourself needing several dump trucks to transport all your money around. So, what excuse could one possibly have for not diligently doing research on an investment, if all it takes is roughly the same amount of time that it takes you to microwave last night’s leftovers?

If you don’t ask yourself any of these questions before you sink your money into an investment, then don’t be surprised when you have to sell your car tires to pay the rent that month. As my favorite guru (Warren Buffett) once said: risk comes from not knowing what you’re doing.

So, how do you avoid risk? Know what you’re doing. And how do you know what you’re doing? Ask [LOTS of] questions –- and make sure you get the answers! Or else you’ll be stuck with a losing investment. And a printer that does everything but print that report you so desperately need that very second (or whatever else it is that you people print).

About our guest writer: Mr. Moneybags has recently written the greatest book on investing in stocks that was ever written…and is offering it for free on his site (for now). So, go download it right now at meanstock.com/book. If you want to get answers for your investment related questions, feel free to download his awesome book.

Created May 7, 2007. Updated August 23, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.