CHAPTER 5
Stock Research Checklist—Business Characteristics
When you are investing in a stock, you are part owner of that business, which means you should understand that business thoroughly.
Are You Able to Understand the Business Thoroughly? Is It a Simple Business?
What are the company products? How is the company generating revenue? How is the company’s marketing? What is the competitive landscape? What are the future prospects? Do you understand the business life cycle? If you are able to answer all of these questions, then you understand the business.
Simple Business
Companies that are involved in simple types of business tend to perform better during the long term. For example, Coca-Cola has been in a simple beverage business for more than 100 years and is making shareholders rich. That simple business is easy to understand. Compare this business to some companies in high-tech industries where product life cycles are very short, maybe 18 to 36 months. If the company does not innovate the next product before the end of its current product’s life cycle, it will not be able to sustain its revenue and earnings. If you are working in the same industry, then you will be able to understand those life cycles thoroughly, which makes that business a simple business for you. Whether a business is simple or not depends on the investor’s circle of competence. Constant product-generating businesses perform better than frequent product-changing companies. This is because the management ...
