Some Thoughts on Due Diligence (DD)
"What some consider DD and what I consider DD are worlds apart..."
So What is Due Diligence?
This question is often unanswered or worse misanswered. Many "investors" consider the latest 'hot tip' to be sufficient DD. I don't. Even if I choose to evaluate a 'hot tip', most never get past my Technical Screening process. Those that do get to pass the following rigorous gauntlet. Why so difficult? I wish to avoid actually having to visit the company! But that is another tale altogether.
This is my idea of DD:
1. Gather all contact information available.
2. Read the Filings. Perform Fundamental Analysis.
3. Contact IR to verify steps 1 & 2.
4. Read the Filings.
5. Review independent sources for ratings or opinion.
6. Read the Filings.
7. Review trading logs.
8. Read the Filings.
9. Judge Public Sentiment.
10. Read the Filings.
11. Review Technical Analysis on non OTC issues.
12. Read the Filings.
13. Review Fundamental Analysis.
14. Read the Filings.
And last but not least
READ THE FILINGS!!!
What do you ask the IR?
Since step one involves gathering contact info most opening questions will involve verifying that information (ie Transfer Agent). This lets the IR know you are serious and have done your homework.
If you have read the filings you can and should ask the status of any financing agreements and or recent announcements (PR's) that are relevant. In the case of a PR that says something will happen by x date, you can ask if date was met, and if not why not. Don't be confrontational just ask about status.
How you do things will have a great impact on the response from IR. Deliver questions straightforward and forthright. Don't try to cover too many topics at once. When you hammer an IR they tend to defer their answers. Nobody likes to get the third degree.
The biggest thing to remember is that this conversation should take place BEFORE you buy the stock and AFTER you've read everything available about the stock. As you read there will be questions that arise. Some will be answered by further reading, only the few that remain after your research will require an email or phone call.
Do IR's Lie?
A good IR won't lie because that breaks the distinction between an IR and a PR. Listen for hyperbole. A good IR will remind you of Joe Friday on Dragnet...just the facts. Too much enthusiasm may indicate that you should place your investment elsewhere.
My DD will usually begin with 25 issues or so. By the time I'm done with steps one and two it's usually down to 3-5. More often than not I delay contacting IR until the last step. That way I don't have to write more than one or two.
Good DD doesn't happen by accident. It also doesn't eliminate losses. But it can go a long way to reduce the frequency of losing.
Good luck to all!
David Weed
aka the Bird of Prey
www.warp-drive.com
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