Tuesday, May 27, 2008

How well do you know your stocks?


Seems like a stupid question, doesn't it? I'm being totally serious though. Maybe you can know ROA and ROE and other profitability rations, but do you know how the company makes those numbers?

Actually what I'm asking is how well you know the company's represented by the stocks you own? If you're a technician or a momentum investor, feel free to tune me out. This may begin to sound an awful lot like the teacher from "Peanuts."

Have you done more than read the Yahoo! Finance summary? Have you even checked out their website? You need to know more than "they're a Chinese telecom company."

Who are the top management? Who's on the board? What sort of experience do they have?

Do you know how they make money? No, really I'm serious. This is a more complicated question than what do they sell? For instance, General Motors makes most of its money from financing the sale of cars. What are their best-selling products? What are their margins? What's the five-year trend? Are they growing or shrinking?

What's the business model? What are its strengths and weaknesses? Who are the competitors? What're they doing that's different? Who are the customers? Are they dependent on a small number of key companies or segments? What about suppliers? Does your company depend on one source for a key component? Is its supply tight?

These questions are all great starting points for understanding the business that you now own.

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