There are many investors who do their home work before they start investing in a stock. Many stock market crashes has not only taught us to do due diligence of the stock but also to avoid the careless nature of selecting a stock. Before you start finding stocks with excellent fundamentals, you should first look at seven important questions to ask before investing in that stock.
Here are the questions:
- Is the company free to adjust prices to inflation?
- Is it likely that a new product or service will come along within the next 10 years and completely wipe out customers’ needs for this product or service?
- Does the company have a strong moat? A moat is one or more of brand, exclusivity, size or price (for example, does the company have a strong, trusted and recognizable brand, does it have an identifiable consumer monopoly in its region or globally, is it large enough to overcome competitors or can it compete effectively on price for long periods of time?). What does the company do or have that protects it from competition and keeps its customers coming back?
- If a new competitor came along with one year’s worth of unlimited funds to fight for the company’s customers, how vulnerable would the company’s future be?
- If the company had to quit advertising or expanding for the next year, how badly would it be hurt? Could it recover after that year and bring customers back?
- Does the company produce a product or service that has been used by its customers for at least the past 10 years?
- Will this company’s products be used for the next 10 years?
If the company you’re looking at can make it past these questions, chances are you’re looking at a great company that just might make a terrific investment. On the other hand, if the company fails to pass through these questions, it’s probably best for you to ignore it and move on.