Doing your due diligence when picking stocks is one of the most important steps of the investing process, right next to having a brokerage account and the necessary capital.
Due diligence requires investors to investigate a company to ensure it satisfies your goals, such as your risk-appetite and ethical standards.
To do this, investors consider things such as revenue, earnings, dividends, how the company stacks up against its competitions, management, and the many kinds of risks that the company faces. These are just some of the seemingly endless data points that investors peruse while making choices.
Thankfully, in investing, we have spot-on gurus that put out reports covering all of these for you, so we really just need to find those reports.
Just kidding… in reality, investors operate in one of the noisiest environments there is . From articles, to podcasts, to television shows and appearances, blogs, message boards, right on over to drinks with friends. Everyone has an opinion, everyone wants to be heard, and everyone wants you to think they are right.
So while sure, everyone has an opinion and desire to be heard in regards to pretty much everything, the stock market is basically the place where opinions on why Apple is better than Microsoft, or why this pipeline or that oil spill are a big deal, are heard and interpreted in a way where people gain or lose money.
For investors, this can be overwhelming and make stock picking an arduous task. To avoid a sea of opinions on why you should and shouldn’t buy a stock, experienced investors drown a lot of this noise out. But both novice and experienced investors are humans that are capable of being lazy and taking the easy way out. So, when offered an opportunity to invest without having to do their due diligence, such as hearing buy pitch that includes some information that seems like due diligence, investors can be drawn into a dangerous game of follow-the-leader.
The first thing investors should remember is that, especially in the case of TV appearances and other public statements, these people, in that moment, are salesmen. Do not take them at their word. Double and triple check everything.
After ensuring that the "guru" is, at the very least, not spewing false claims, you’re going to want to take a step back and pretend that you didn’t hear any of it. Try starting from the ground up and go through your process to see if you get to the same conclusion. You won’t forget every argument, but try your hardest to not let their due diligence influence yours.
If you were just presented with a compelling buy (or sell) case, then you were given the gift of extra due diligence for a given stock. Treat it as both a learning opportunity and an insurance policy.
What I mean by this is: look at the report thoroughly because, who knows, you might be granted a new insight into how to go about your own due diligence. But also treat the information as an insurance policy because, well, you don’t live more recklessly just because you have life insurance. It's good to have, but it shouldn't change your process.
So what do you do when all of the answers are given to you by a guru, friend, or short seller? Well, you just say "thank you" and then start from scratch with your own research. You learn what you can from their work and see if it passes your test as well. You earn an extra educated opinion on the stock, rather than settling for a reckless trade.