Due diligence

I want to talk about due diligence. I have in the recent weeks noticed fellow junior retail investors getting frustrated about losses in their portfolios. We see them trying blaming whoever wrote something about a company as an investment idea and since it’s seldom that anybody does their due diligence before buying – no one seems to know what they bought.

Nowadays we have unlimited information at our hands, mostly instant updated. For instance, we have Twitter with hashtags as #pratapengar, #finanstwitter, and #fintwit, etcetera. We also see Twitter profiles that are more or less self-proclaimed “financial gurus”. We further have a vast variety of financial podcasts and youtube channels talking about investments.

Some of these channels have sponsorship behind them. It could be banks, mutual funds or companies behind the support for the author. We also see sponsored analysis performed by different Equity Research Firms. We can even find special Facebook groups pumping different cases to junior retail investors.

All these channels of information make it hard for the individual investor to know what to believe and what to consider before investing in a company. Is the data provided true or not, who is behind?

We can take the example of the Swedish candy company Cloetta which has been talked about in numerous channels. The stock has been raised to the skies as a top case to buy. From ATH the stock has lost about 30%, and I am sure that we have a lot of retail investors coming in late into the stock just before its journey down. We can find the same patterns regarding a broad variety of cases, for instance, bitcoin, altcoin, cannabis companies, Chinese companies and companies with high risk and low liquidity etcetera. A famous Swedish example that had its peak for a couple of years ago was Fingerprint Cards.

For me, it is fascinating to hear friends or colleagues having discussions at the lunch break about where to find the cheapest product of something and how detailed their study could go. The differences in price could be as low as some dollars between them products. But regarding investments, the same persons could easily invest hundreds or thousands of dollars in a “good case” that they heard about from somebody.

It is always important to do your own analysis before being anything! Jim Cramer, in his book “Real Money,” advises investors never to purchase a stock unless they have an exhaustive knowledge of how they make money. What do they manufacture? What kind of service do they offer? In what countries do they operate? What is their flagship product and how is it selling? Are they known as the leader in their field?

If you don’t have the time to at least get the understanding of these fundamental questions, it’s better to invest in a mutual fund or an index fund. If you are a Swedish investor you can, for instance, invest in Skandia Sverige Exponering. This example would give you exposure to the Swedish index SIX PRX which is average of all Swedish stocks including dividend considering fund investment regulations. If you are an American investor, you could use an ETF like SPDR S&P 500 ETF (SPY) or Vanguard S&P 500 ETF (VOO).

Invest in companies that you understand, not companies that are a mystery to you. Invest in financial instruments that you understand. If you don’t understand crypto currensies, derivatives, options, and futures, don’t do it.

Bottom line

  • Only invest in things you can understand
  • Don’t buy on rumors heard on the street
  • Don’t buy with the money you need shortly
  • Avoid lending capital for investments
  • Diversify your portfolio
  • Always do your due diligence before investing

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