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Do Your Due Diligence!

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June 16, 2009 – Comments (11) | RELATED TICKERS: REA.DL.DL2 , D

I've noticed myself commenting on several blogs lately, saying things like "do your due diligence, or you deserve to lose money."  It has come to my attention that some fools do not do their own analysis, but follow the picks of top fools in their real life portfolios.  This is a very dangerous habit, and is one that should never be followed.  If you can't give me a quick 5 minute pitch for a certain stock on the spot, you probably shouldn't own that stock.  You should be able to tell me exactly why you bought that stock. 

I often tell people to gain a strong base of knowledge.  The easiest place to find that the fastest is not blogs and articles, but books! I recommend the following books, all of which I've read:

The Intelligent Investor by Benjamin Graham
Security Analysis by Benjamin Graham
Contrarian Investment Strategies: The Next Generation by David Dreman
What Works on Wall Street by James O'shaughnessy
Common Stocks and Uncommon Profits by Philip Fisher
One Up on Wall Street by Peter Lynch
The 5 Rules for Successful Stock Picking by Pat Dorsey
The Rediscovered Benjamin Graham: Selected Writings of the Wall Street Legend by Janet Lowe

The list goes on and on.  You should also add books on bonds and options.  Financial statement analysis is covered somewhat in Security Analysis.  Basically, I think Warren Buffett's advice to "read everything in sight" is excellent advice.  There are many more good books out there, but the above list is a good start.

My reading list has books on mostly fundamental analysis.  I do not agree with technical analysis, but I do believe that it's definitely possible to make lots of money using technical analysis.  Anyway, whatever method you choose to follow, you should know your stuff.  As I said earlier, you should be able to give a long and clear-cut explanation on exactly why you buy something.  If you can't, you haven't done your due diligence!

Once you have your base of knowledge, you can then read the numerous blogs and articles that can be found on the Internet, and boy there are plenty.  You'll find, though, that some so-called "experts" actually have no idea what they're talking about! With your new base of knowledge, you now have a BS detector and you know what's sound advice and what isn't.  I'd personally avoid personal finance articles for investing advice, because they only recommend index funds and blue chips.  Those aren't necessarily bad investment vehicles, but I'd guess that many of you come to CAPS to learn how to BEAT the market, not to own the market.

I think the fastest way to find good investment ideas is to use a good stock screen to narrow down to a manageable list, and then to check the fundamentals.  Check annual reports and quarterly filings, check 10 year financial statements, go to their website, read the pitches on CAPS, and really get to know your company. 

The fastest way to start this process is to get that strong foundation.  Read every book in sight, and know how to discern for yourself whether another blogger or some expert is talking legit stuff or spewing garbage at you.  Books will bring you up to speed much faster than articles/blogs, so I highly recommend starting there. 

11 Comments – Post Your Own

#1) On June 16, 2009 at 2:08 PM, portefeuille (99.60) wrote:

Very good post! I did not find anything that I don't agree with (hehe). I would like to add that if you do not know too much about economics you might start studying some of the basics of that field first and if you do not know what an exponential function or an integral or a derivative (not talking about financial instruments here) is you might even want to start with a mathematics book ...

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#2) On June 16, 2009 at 2:18 PM, bigpeach (28.49) wrote:

Well, you get a rec for the rare, sensible advice, but it probably won't do much good. There will still be a lot of people who follow the top Fools because they're so "accurate."

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#3) On June 16, 2009 at 2:25 PM, portefeuille (99.60) wrote:

There will still be a lot of people who follow the top Fools because they're so "accurate."

The quotation marks are there for a reason: see this post.

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#4) On June 16, 2009 at 2:28 PM, bigcat1969 (92.59) wrote:

Good advice and thanks for the reminder that no one loses your money except you.  I copied your list and intend to see what I can find at the library as I am a cheap fool.

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#5) On June 16, 2009 at 2:33 PM, MattH42004 (30.14) wrote:

Nice list. This is the first I've heard of the Dreman book, it looks interesting. Personally, I would add THIS. And it's free...

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#6) On June 16, 2009 at 11:00 PM, ChrisGraley (29.75) wrote:

But if your diligence sucks, copy somebody elses diligence!

Sorry, I couldn't resist.

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#7) On June 17, 2009 at 7:21 AM, TMFBabo (100.00) wrote:

portefeuille: I agree that you might want to read economics too.  However, I don't think it's completely necessary, if you can learn how to see if a stock is undervalued relative to its industry and to the general market.  That doesn't require economics.  Economics will help in the long run, and I recommend it after you've gained solid investing principles.  I do think, however, that the solid investing principles should come first.

bigpeach: Well, if even one person decides to read more books because of this post, then there's one person who will learn to invest with sound principles.  I do agree with you though, that many will continue to follow the top fools, which is a bad strategy.  You should go to others for ideas, not action plans.

bigcat1969: Glad to hear you'll be reading some of those books! I do recommend all of them.  As far as the Janet Lowe book goes, on selected writings of Graham, read that one after the two Graham books.  It's an excellent reminder of Graham's philosophies.  I consider Graham the best writer on value investing, so he's a great read.

MattH42004: The Dreman book a pretty solid value investing book.  It did have some ideas that I hadn't heard before.  I remember going to Amazon to buy Margin of Safety only to find that it costed 600 or 700 dollars for the cheapest used copy.  Thanks for the link! I'll read it when I get the chance.

ChrisGraley: The funny thing is, I think that can still work.  If you learn solid principles, you can see if someone else's diligence is BS or good.  I've actually used someone else's diligence before, but it was very well-written, detailed, and covered all bases that I wanted.

 

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#8) On June 17, 2009 at 7:52 AM, portefeuille (99.60) wrote:

I remember going to Amazon to buy Margin of Safety only to find that it costed 600 or 700 dollars for the cheapest used copy.  Thanks for the link! I'll read it when I get the chance.

The link is not working, but I guess google will show the way. For a great talk by the author on "value investing" see this post.

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#9) On June 17, 2009 at 10:14 AM, MattH42004 (30.14) wrote:

bullishbabo

Portefeuille is right, the PDF has been taken down, apparently I should have done more due diligence on my linking :) Hopefully Google can solve the problem, If not I'm sure e-mail can...

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#10) On May 14, 2012 at 11:06 PM, diegorgazzi (< 20) wrote:

TMFBabo, most of what you short in CAPS are ETFs... None of the books you mention cover ETFs, any recs?

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#11) On May 14, 2012 at 11:39 PM, CardenasAlbertt (< 20) wrote:

just as Danny said I'm shocked that some one able to get paid $8636 in 1 month on the internet. have you seen this website(Click on menu Home more information)   http://goo.gl/J4UCz

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