5 Questions You Should Ask When Buying A “Business”

In the previous post on Buying Stocks Equal Buying Business, I urged you to have a business-driven mindset whenever you are making selections in the stock market. You shouldn’t go ahead and buy a stock that you have no idea what the company business is. Just like you would not buy a TV without knowing what’s the brand, the quality, the reasonable price to take and are there any other better options from its competitors.

Personally, I would prefer not to buy any business that I do not understand. As I know without adequate knowledge, I would not be able to make a sound judgement. I just do not like the feeling of not having control over my portfolio. As adage always said, ” If you do not have control over the external forces,  the external forces will have control over you.”

So to help you evaluate yourself and the company: I present the 5 questions that you should ask yourself before buying a stock:

1. What products or services are the company providing? 

This is the very first question you should ask yourself. You could be using the product yourself and thus already knew about the company’s product ranges. If not google it or walk on the streets (visit supermarkets, shopping centres, etc) to do a market research.

If you can’t even answer this fundamental question, then I will be puzzled that why did you even consider this company in the first place? Because of the uprising trend? Please remember that trend is driven by market sentiment, people like to flock in when there is an upbeat in a particular stock but when things go wrong, everyone will run doubly quick. In the end, we, retail investors, suffered the most. Remember the recent massacre happened in SGX with regards to the trio penny stock? It really break my heart to read about people losing their entire saving in just a day.

2. Are the product and services able to found elsewhere?

In other words, you are trying to identify your company competitors. You would like to buy a monopoly business if not limited entry to the same business. If you do have a couple of competitors, you should proceed with the following question, no. 3.

3. As a consumer, will you buy the product from this company or from others?

This will identify the strength of the company or some financial analyst like to term it as competitive advantage/economic moat.  There should be a strong reason for you and other consumers to stick to the company product, if not, then this company position in the industry is weak and tend to be challenged very easily.

The strength could be in terms of branding (think of coca cola for drink, Osim for Massaging Chairs), quality (Apple for innovative gadgets, Toyota for durable cars) or even price (Sheng Siong for supermarkets). Although personally I would less prefer the price for being a strength as it will tend to eat into profit margin or worst still, involved in price wars with competitors.

4. Are the reason for the company to stay at top position, sustainable?

This question will help you to identify the company’s ability to survive in this harsh business environment.

That’s also because one of the reason why I don’t like the price to be the only competitive advantage a company has – It is not sustainable! In order for your portfolio to grow long-term, you will need to seek for a long-lasting advantage. The value the company is providing ideally should be able to last for many generations to come. For example, people will need food and drink no matter how badly does the economy is performing. Oil is definitely needed to fuel our cars, power up our generators etc.

5. Are there any potential growth or catalyst that push its business to greater height?

The world is changing everyday and rapidly.

This question is important as it will not only ensure the company’s survival but also growth! It acts as a filter to separate an outstanding company from an average company. In this time of economy where inflation is like on ecstasy, without growth potential, the company will be on its way to death. The reason? The company cannot find any good reason to increase price

The growth can be measured by either revenue growth or in an intangible aspect, is there any potential innovation ideas spawning in the company that could be the next big thing?

Conclusion

These 5 questions will only aid you to identify the business the company having together with its strengths and weaknesses. However, before you jump into any stock and put in all your money. You will have to look into other aspects such as the health of the company. A good company might not be in good health now. Health can refer to cash flow and its debt gearing.

So readers, do follow spectra of life for more insights into investing. I would try my best to share as much as possible. So do stay tuned!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s