4 Questions To Ask Before Making An Investment
There are 4 general questions to ask before making an investment. These questions will help you understand whether a particular investment is viable or not.
What is going on? - The investor should be looking at a company's operations and trying to understand how the business makes money. The investor should be looking at the company's financial data to determine if the financial data matches their operations and what the business is doing to make money. If you can understand what the company does to receive revenue, how they spend their expenses, and how exactly they turn a profit, then it's time to move to question number two.
How is it happening? - After understanding what is happening, truly dive into the aspects of how it happens. What are the essential functions of the business and how do all of its moving parts work together to achieve the goal? Understanding how a business runs is equally important in understanding whether an investment is viable or not.
Why is it happening? - Why is this company performing so well? What is causing the demand for their good or service? These are the questions that are going to help fully develop your understanding of the business and its place in the economy. It serves a particular function otherwise it wouldn't exist, as an investor we must have a crystal clear understanding of what that function is.
What is going to happen next? - Now that you understand the business, it's time to start looking forward. Will there be increased demand for this product/service in the future? What are the company's plans for innovation or advancing their current position? As investors, we constantly need to be look ahead into the future and trying to predict what will happen next.
These are the four questions we need to ask ourselves before we make any investment. It is crucial to be diligent in all aspects of this process, because if we invest in things that we don't understand then we're surely going to break rule #1.