1.14. What to Research Before Buying
Lesson objective
Adopt a basic set of research questions.
Before buying a stock, begin with the business: what it sells, who pays, why customers choose it, and what could change. Then review growth, profitability, cash generation, debt, valuation, and risks.
Good research does not search only for reasons to buy. It should actively look for information that contradicts the initial idea. This discipline reduces confirmation bias.
The conclusion may be to buy, wait, reject the idea, or continue researching. Choosing not to act is also a valid decision.
A beginner's research funnel
Understand business → Read numbers → Check balance sheet → Examine cash flow → Compare valuation → Read filings/risks → Write thesis
| Question | Evidence | |---|---| | How does it make money? | Products, customers, segments | | Is it improving? | Revenue, margins, earnings, cash flow | | Can it survive stress? | Cash, debt, maturities | | What am I paying? | Valuation vs. history, peers, growth | | What breaks the thesis? | Competition, regulation, execution |
The sentence test
“I am considering this company because ___; the evidence is ___; the main risk is ___; I would reconsider if ___.” If you cannot fill the blanks, the research is probably not finished.
In Finzati
Use the company page to answer questions about the business, growth, margins, debt, cash, valuation, recent events, and risks.
What you should remember
- Understand the business before looking at a score.
- Search for both favorable and unfavorable evidence.
- Write down your reasoning.
Practice
Choose a familiar company and complete a one-page research sheet using the questions above.