Due Diligence

by Randy Cox

Due diligence is a term used to describe an investigation of a person or business opportunity as to whether or not the person or project is worthy of an investment.  It is an important part of money management.

Due Diligence first came about as a result of the US Securities Act of 1933.  It was used as a defense by brokers and dealers trying to prove they had done reasonable investigation of investment opportunities that later went badly.

Now it is used more widely to describe the minimum process of prudent investigation and fact gathering that an investor should do before making an investment decision.  It is just one tool in the money management bag.

As an art more than a science, it becomes a process that is constantly adjusted with experience until the risks of investment decisions are calculated with as much knowledge as possible rather than blind gambles.

Blind gambles are based on hope and not fact.  Even after due diligence has been done, surprises happen.  Dishonest people sometimes go to great lengths to conceal pertinent facts that would influence judgment.

A capitalist should learn body language to alert him to signs of dishonest behavior.  Also, acuity to instinct and intuition can be developed.  Pay attention to what goes on around an investment opportunity.

The due diligence checklist will differ according to the good or service being contemplated, but  the more exhaustive it is the less often the surprises will occur.  We want to make our deals and move on to the higher level so we can accomplish our goal.

Before we dabble in a market we are unfamiliar with, we should research the market.  We should know the quality names and models from those considered lower quality.  How much should we know?  The answer is simple.  We should know at least as much as the owner we are purchasing from and we should know substantially more than those we plan to sell to.

Let’s get rich!