How To Invest By Asking Right Questions?
You don’t need big ideas to be a successful investor and create wealth but rather need small ideas which can work really big. Investors make many decisions in their journey and most of the decisions taken end futile. No investors take investments decisions by imagining that one will definitely end up with a negative outcome. The problem with investors is that they don’t ask the right questions before making decisions. For example, if your broker calls you and say that, “sir this stock is doing good, please buy it and it will definitely go up”. Then investors would start believing the broker because investors don’t know the right question to ask. The right question to ask your broker is, “if you are so optimistic about the stock, have you bought it?” or “don’t recommend me any stocks but tell me what’s the stocks there in your personal portfolio?”. Great investors have the ability to seek and ask the right questions. By only asking for the right questions we can expand our knowledge base in our investment process.
How to ask the right questions for investors
There is no perfect universal checklist of questions for everyone but there are certain frameworks through which one can develop their own checklist based on their own investing style and behavior. Frameworks are the filters through which we can get a better understanding of the problems.
Framework 1: “All I want to know is where am going to die, so I will never go there “
The first rule for your investment success is survival. The first questions investors must ask is about the survival rate of the business. If the investors are going to invest in a company for the long term (5-10 years), then one must be very careful of selecting the company because only a few companies can survive for that long. If the investors are going to invest in a company, where the long-term survival rate is low but performing spectacularly in the short run, one must rethink again of his investments in that company.
Investors can increase their survival rate just by not investing in companies having a low survival rate. Investors can use this framework to ask questions about the survival rate of the company. For example, we may just ask, “does the company consistently borrowing money” – if yes, don’t invest. You may argue that “what if in future the company settle all its debt and become debt free”. You are absolutely right about it but what if that doesn’t happen. As a minority shareholder, we cannot be completely over-optimistic about the future of the company. If we are predicting the future, we are indirectly fighting with uncertainty. We cannot explicitly know what is there in the management’s mind about the company. So, prefer avoiding those companies to increase your survival rate because these companies may even go bankrupt if the debt is not managed properly. Always prefer companies having a high survival rate( less or not debt) companies.
Framework 2: “This time it’s different”
The most dangerous four words in investing are “This time it’s different”. Think of Y2K boom in 1999-2000, when all the share prices of internet companies skyrocketed. Many analysts also gave the reason for high valuations to be, “internet companies are new economy companies and internet is going to change the world so, they deserve high valuations and often said that this time it’s different. The Internet changed the world but most of the investors who invested in internet companies lost their money which again proved that this time it is not different. This framework will help investors to ask questions about the company, which is still struggling to grow now but has an excellent future. For example, if you are investing based on Electric vehicle (EV) theme and If you think that electric vehicle can revolutionize the automobile industry so, by investing in certain companies’ investors may benefit in future. Then your questions should not be regarding how well the automobile industry is doing, your question must be,” how are oil companies doing, are they increasing their profits, are they increasing their expansions, what do oil companies want to say about Electric vehicles? Cross-industry analysis questions can be asked using this framework. Asking and finding the right questions is the key to your investment’s success.
Framework 3: “Don’t fool yourself because you are the easiest person to get fooled by yourself”
Investors generally try to buy the shares of the companies by its popularity and not by its value. Investors think that what is popular might be true and they also think that, if everyone is buying then he should also buy it. By buying based on popularity, investors are fooling themselves but the sad thing is that investors are being unknowingly fooled by themselves. Since the foolishness is unknown, they are not able to rectify it. This framework can be used to ask questions regarding various biases that investors face because it is through biases only, we get fooled by ourselves. Investors must first answer a simple question, whether one is buying based on popularity or based on his own research. Asking a few simple good questions makes a huge difference.
We don’t need to know many frameworks but rather just a few high-quality questions to make decisions. We have to very clear that, we don’t need to get answers to the questions we seek for but rather the essence of asking right questions is to broaden our approach to think in various mental frameworks.
We have discussed three frameworks for asking the right questions with a few examples. As we know that, there are no single universal checklists of questions which can work for everyone, so one can develop their own list of questions based on the above frameworks. In the next post, we will be discussing another three frameworks which might help us to ask good questions.