10 Questions to Ask before Making a Stock Market Investment

Developing a reliable checklist for selecting stocks is a prudent approach to ensure that no crucial details are overlooked before investing in a company. In the words of Charlie Munger, Vice-Chairman of Berkshire Hathaway:

“Even the brightest mind isn’t immune to the benefits of a checklist.” — Charlie Munger

A Note of Clarification: While the considerations for choosing stocks are numerous, many of them can be condensed into the ten essential questions provided below. Please note that I am not asserting that this is the definitive stock selection checklist. I encourage you to explore the outlined investment checklist, customize it as per your preferences, and formulate your own set of inquiries.

10 Questions to Ask before Making a Stock Market Investment

  1. Understanding the Company’s Nature:

What products or services constitute the core of the company’s offerings? How does the company generate its revenue? Which of its products or services significantly contribute to its earnings?
  1. Evaluating Leadership and Management:

Who are the key individuals steering the company’s direction? Is the company led by its founders or owners, or is it under professional management? Could you provide insights into the backgrounds of the CEO, MD, Board of Directors, and other key figures?
  1. Assessing Profitability:

What has been the trajectory of the company’s profitability in recent years? How do its operating and net profits appear, along with its profit margins across different levels? Is the company’s profitability consistently on the rise, or has it remained steady or declined?
  1. Identifying Competitive Advantage:

Does the company possess durable competitive advantages, such as distinctive assets, customer loyalty, network effects, or cost leadership that can safeguard its profitability against competition?
  1. Analyzing Historical Performance:

Could you provide insights into the company’s historical financial performance? What patterns emerge from critical indicators like sales, EBITDA, cash flow from operations, free cash flow, and other financial metrics over the past years?
  1. Scrutinizing the Balance Sheet:

Is the company’s asset base expanding over time? How does its liability profile look? Is shareholder equity witnessing growth? Could you elaborate on the company’s cash position? Is there a notable commitment to Research & Development?
  1. Management Integrity:

Is there any history of the company’s management or promoters being involved in fraudulent activities or scams? Has the company demonstrated transparency and ethical conduct in its interactions with shareholders? Are there any instances of regulatory actions by bodies like SEBI ?
  1. Understanding Market Position:

Who are the main competitors, both direct and indirect, in the industry? How does the company’s market share fare against its rivals? What sets the company’s strategies apart from those of its competitors? Are there international competitors to consider?
  1. Debt Assessment:

Could you provide insights into the company’s levels of short-term and long-term debt? Can the projected profits or free cash flow adequately cover the company’s debt obligations? Are there instances of shares being pledged by the company’s promoters?
  1. Valuation Evaluation:

What is the estimated intrinsic value of the company? Do current valuations suggest that the stock is overpriced, under-priced, or reasonably valued? How substantial is the margin of safety in your investment? Would purchasing the stock at present entail over payment?
Remember, tailoring a stock selection checklist to align with your investment philosophy can greatly enhance your decision-making and potentially lead to more favorable investment outcomes.

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