The three most common investing mistakes relate to the price you pay, the management team you essentially join when you invest in a company, and your failure to understand the future economics of the business you’re considering investing in. The questions in this book can help you minimize these mistakes by helping you gain a deeper understanding of how a business operates:
Chapter 1 outlines a search strategy that will improve your odds of finding investment ideas that are worth researching further.
Chapter 2 helps you understand the basics of a business: What it does, how it earns money, how it evolved over time, and in what geographic locations it earns its money.
Chapter 3 demonstrates the importance of understanding the business from the customer’s perspective rather than your own. These insights will help you learn how important a business is to the customers it serves.
Chapter 4 helps you evaluate the strengths and weaknesses of a business. These are the questions that will help you evaluate whether or not a business has a sustainable competitive advantage, the competitive landscape, and the industry it operates in.
Chapter 5 helps you understand the operational and financial health of a business. You’ll look at key risks facing the business, how inflation affects it, and whether its balance sheet is weak or strong.
Chapter 6 looks at the distribution of earnings (cash flow) of a business. You’ll learn how to assess whether the company’s accounting practices are conservative or liberal (so you can avoid a company like, for example, the now- defunct Enron), the type of revenue it generates, whether the company makes money consistently or in cycles, and whether or not it’s resistant to recessions.
Chapter 7 is the first of three chapters that show you how to understand the quality of the management team. You’ll look at what type of manager they are, how they rose to lead the business, how they are compensated, and other background information.
Chapter 8 helps you gain insight into the competence of a company’s senior management. You’ll look at how they handle daily operations as well as long- term strategy, how they treat employees, and how they think about costs.
Chapter 9 helps you assess the management of a company by looking at their positive—and negative—traits: How they think, whether they’re self- promoting, and other critical factors. Remember, when you buy stock in a company, you’re essentially going into business with the managers who run that company, so you want to know as much about them as you can!
Chapter 10 demonstrates how you can evaluate the future growth opportunities of a business. You’ll look at whether it’s growing organically or by merging with or acquiring other companies, whether historical growth has been profitable, and how quickly it’s growing and whether management is growing in a disciplined way.
Finally, Chapter 11 looks specifically at mergers and acquisitions, to determine whether those completed in the past have been successful and how management makes the decision to merge with or acquire another company.