Posts Tagged ‘due diligence’

Too lazy to stretch? (The Financial Athlete #31)

July 28, 2008

Stretching properly not only prevents injuries, it enhances game performance.

My stretching routine begins with dynamic stretches before a sports activity. This warms up my muscles. Then I do static stretches after the sports activity. The point of stretching is to relax the muscles. However, stretching alone may not relax the muscles. The mind must be calm for the body to relax. Calm mind…calm body. Calm the mind through meditation or breathing exercises. Thus, meditation and breathing exercises can be viewed as stretches for the mind.

People skip stretching because it’s boring for them or they think they have no time for it, only to pay the price with physical pain later. Likewise, many investors skip due diligence for the same excuses, only to pay an emotional toll of anger, worry, and regret later.

Investing without doing due diligence is like playing a rigorous sport with muscle tensions and spasms. As silly as this sounds, this is precisely how many go about investing. It’s the easy and fun way, until the losses start rolling in. Practice proper due diligence, which is the heart of investing.

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Exercise effectively* (The Financial Athlete #28)

July 23, 2008

The gym is full of people doing ineffective exercise routines:

1. The middle aged man who desperately tries to lose his pot belly by doing hundreds of crunches a day does not realize crunches will only strengthen his abdominal muscles and do little or nothing to burn the fat that hides them. Meanwhile, another man beside him spends minimal time on direct ab work but has ripped abs because he concentrates on full body exercises such as pull ups, dead lifts, and lunges.

2. The young woman riding 40 minutes on the stationary bike at a leisurely pace while tuned into the TV burns less fat than her healthy friend who breaks a sweat as she maintains a mind/muscle connection in her 20 minute interval training workout on the stationary bike next to her.

3. The college kid who spends half an hour on the bench press and hardly any weight training for his back muscles only bothers to look at his chest in the mirror. In time, he will also notice a rolling in of the shoulders due to an imbalanced body structure.

4. The muscle man who consistently works out two hours a day, a good portion of that time resting in between weight lifting sets which isolate a single muscle. Another muscle man completes a comparable workout in half the time because his routine centers on multiple-joint exercises and supersets. (An example of a superset is triceps extensions followed by bicep curls.)

To save time in my workout I choose effective and efficient ways of exercise. The same holds true for the exercise of due diligence with investing. To begin with, an investment opportunity must meet my initial criteria before I dig deeper into research. This filters out unwanted assets quickly. If the investment opportunity meets my initial criteria, then I implement a system of Pros and Cons based on Michael Porter’s SWOT analysis.

SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. Strengths and Weaknesses are internal factors such as Working Capital and Debt/Equity Ratio. Opportunities and Threats are external factors such as product market trends and competition.

A SWOT analysis forces us to see the whole picture. See the whole picture, and eliminate the tendency to become over-bullish or over-bearish. Due diligence is incomplete without exploring all four facets (Strengths, Weaknesses, Opportunities, Threats). Incomplete due diligence is nearly as bad as no due diligence, because it leads to false conclusions.

*People with heart problems and some other physical ailments should not increase the intensity of exercise with sprints, interval training, fully body exercises, and supersets. Consultant your doctor before doing this.

A game of inches (The Financial Athlete #15)

June 17, 2008

Golf is the epitome of a “game of inches.” To miss one put by less than an inch can cost the game. Professional golfers practice puts for thousands of hours. Without frequent practice, even the best of them can lose their touch. Much time alone dedicated to practice will not do. The mind of the golfer must be completely concentrated.

One aspect of investing is the “game of inches”. Consider how Warren Buffett spends hours combing through Annual Reports and SEC filings. If you choose to invest in individual stocks, you should do no less. Read thoroughly financial statements and the fine print. Readng SEC filings may be an intimidating exercise at first, but you will grow accustomed to the parlance. Don’t buy until you understand the material. What good is due diligence without understanding? This is like putting without concentrating. If you are not yet financially literate, then you are not ready for investing in individual stocks. Fortunately for real estate investing, help is easier to find with a real estate attorney who can make sense of the confusing legalese. Never be too proud to ask for help from a competent accountant or lawyer if you need a clearer understanding of an investing prospect. These people are trained to play the “game of inches”.