20 Stock Research Questions (A Beginners Research Guide)
How to research a stock
Investing successfully in individual companies comes down to one trait: Judgement.
When investing in individual companies, you have to make the right judgment call on WHEN to buy a specific stock and WHEN to sell it.
That’s what makes investing in individual stocks so tricky.
(And that’s also why I’m a big advocate of Index Investing.)
You must have a deep understanding of the business world and the company you are investing in if you want to be successful.
The more you understand a specific company, the better your judgment will be.
Don’t get me wrong, you can get lucky at picking individual stocks without actually understanding what is going on “under the hood” of the business.
Especially if there is a lot of hype and greed in the market, like in 2020 when almost every stock was going up.
But those periods tend to end pretty quickly, and reality soon returns to the stock market.
“Bull markets go to people's heads. If you're a duck on a pond, and the pond is rising due to a downpour, you start going up. But you think it's you, not the pond.” - Charlie Munger.
The role of the stock market is to properly value a company based on its potential future growth, profitability, and current track record.
The current stock market valuations are made up of the collective judgment of individual investors based on all of the available information that they have.
Nobody WANTS to overpay for a stock. Everybody wants to make money.
What valuation methods do investors use?
Here are a few valuation methods Investors use to calculate the value of a company relative to it’s fundamentals:
Discounted Cash Flow Model (DCF)
Comparable Company Analysis
Asset-Based Valuation Method
Book Value Valuation Method
There are several different valuation methods investors use to develop fair valuations for different companies.
But there is no “one way” to value a company.
Why? Because there are so many different variables at play.
If there were a simple valuation method that worked every time, everybody would use it and finding undervalued companies would be easy.
Some investors use a mixture of different valuation methods, while others use none.
But at the end of the day, it all comes down to an investor’s judgment.
The stock market is made up of humans who don’t want to lose money.
So they will only invest in companies that they judge as either being appropriately valued or undervalued.
If a company starts to seem undervalued to an investor, the rational thing would be to buy the stock at a discount.
If a company starts to seem overvalued to an investor, the rational thing would be to sell the stock.
The role of fear and greed
Now since we are all human, many of us don’t act rationally all of the time.
Especially when fear and greed are at play.
These two emotions impact our actions in the stock market at extremely irrational levels.
Greed will cause investors to value companies overly optimistically, while fear will cause investors to value companies overly pessimistically.
These errors in other investors’ judgment calls can create great opportunities for those who understand what is going on.
“Be fearful when others are greedy, and greedy when others are fearful.” - Warren Buffett.
Your most significant advantage will be researching companies you deeply understand. Maybe a company you work for. Or an industry you have a lot of experience in.
The questions below are meant to guide you in the right direction to ask the right questions when doing your homework on a specific company. Remember that this isn’t the “end all be all” research framework. These questions are meant to get you moving in the right direction.
You are the one who has to make the judgment call.
I hope these questions help you develop the confidence to do so. I’ve also included 5 stock research websites to help you conduct your research.
20 Stock Research Questions:
Part 1: General Company Questions
What is the company’s mission/value?
What problem does the company *actually* solve?
What does this company do very well at?
What does this company struggle with?
What are the company's potential opportunities?
What are the company’s potential threats?
Part 2: Financial Questions
How does the company make money?
How does their revenue growth look?
Is the company currently profitable? If not, why and when?
How might this company perform during a recession?
How does their overall financial situation look?
Can they raise prices without customers switching to a competitor?
Part 3: Leadership Questions
Are the CEO and executive team the right people for the job?
What is the executive team’s track record?
How have they handled pressure in the past?
What type of culture has the leadership created?
What does the stock “Insider Ownership” look like?
Part 4: Competition Questions
Who are the company’s biggest competitors?
How does this company differ from its competitors?
How powerful is the company’s brand?
How loyal are the company’s customers to their core product?
How does the company’s overall industry look?
Best Stock Research Websites:
SEC.gov (EDGAR) You can pull up all of the company’s financial fillings using the SEC’s website. Form 10-k, Form 10-q, Form 8-k, etc can all be found here.
Seekingalpha.com Seeking Alpha is a great tool to find independent stock research from different analysts and investors. You can find different perspectives on stocks from yours that can help challenge your investment thesis before you pull the trigger on an investment.
finance.yahoo.com (Yahoo Finance) Yahoo Finance belongs to the best free investment sites that empower investors to research companies and monitor breaking stock news.
Finviz.com Finviz is a great free stock research tool. Finviz provides an amazing user interface to observe fundamental data on the companies you are researching.
Wsj.com The Wall Street Journal is full of insightful business articles and economic news.
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Want to keep learning? Check out some of my other blog posts:
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #023
