So today I am going to touch on the importance of doing your diligence. When it comes to investments, it is clear there is a varying amount of risk associated, but the average investor needs to be prepared.
When a person peruses financial statements or the annual report, it is important they understand the economic events that are reported, as well as how they are reported, and how they could potentially be “skewed”.
**Statements are compiled with the expectation that potential investors already have a reasonable amount of knowledge concerning them.
Some of you are already well-versed in the inner-workings of these statements, as well as corporate practices. Good job. Some of you might choose to leave it in the hands of experienced, knowledgeable financial professionals. Others are just starting out. Either way, it is imperative that a potential investor looks into things themselves.
Fraud can come in many forms, and outside of it, companies can use legitimate, legal loopholes, or creative accounting to improve the appearance of the strength of their business. Doing your research is key!
I know a company can appear viable, I know someone can give you a great tip, someone can even vouch for a company, but that doesn’t mean it will pan out the way it seems, or the way they say. The best way to minimize risk, is investigate further.
A few things to consider (tip of the iceberg)…
- Know what is amortized versus what is depreciated
- Know what is classified as an asset versus what is liability
- Pay attention to important ratios (but know their limitations)
- Consider where off-balance sheet reporting comes into play, and how that affects the way the company is portrayed
- In regards to that, understand lease obligation reporting and SPE’s
- Does the company have any past financial blemishes?
- Is this company even legit?
- Is there a recent change in leadership?
- What is the state of the market recently?
- What has happened within the industry lately?
- What kind of changes has the company made recently (new product line, just gone public, brand changes)?
- What sort of backlash have they taken recently (litigation, negative consumer feedback, or other events in the news)?
- Investor psychology and how events affect investor actions
People tend to view gains differently than losses. In taking into account different scenarios, people tend to see gains of the same amount as the same, but when the idea of a loss comes into play (or an increase in loss), it changes their perception. In the end, no one wants to lose money, and they certainly don’t want to be misguided. With so much uncertainty in the financial industry, investors want to feel they have all of the right tools to make the best choices. Just remember, look before you leap.
– Erica O?