After an influx of unvetted new investors, it is time to help the amateurs with a little bit of education. It’s time to make this sub great again.
Chapter 1:
“What the fuck does ‘justify your trades’ mean?”
It’s a question that many folks have and will sprint back asking in a matter of nanoseconds. “Why do I have to give reasons? Why can’t we all just fly by the giant throbbing dick in my pants?”
When normal people gamble their money, they like to limit the risk involved, and draw a basis for their expectations of potential gain or loss. Due to this, investors have invented the DD – a versatile tool that both acts as a high-quality plastic upgrade for their wives, and an excellent way to convince others to follow or allow (if they’re an institutional investor) their trades.
A Due Diligence is about like a high school book report but on a stock. It involves some basic preliminary research – most of which can be done with websites not dissimilar to CliffNotes. After choosing a stock, you can pretty much go get condensed data from some website that actually bothered to read the SEC filings and calculate the basic TA algorithms. These are what you will stitch and glue together to make your very first DD collage.
Chapter 2:
“How do I not be retarded?”
This chapter will be my extremely over-simplified, probably-inadequate answer to that question. First and foremost, I believe that there are four key elements to any good trade, listed here in order of importance (top to bottom) and implied penis length when used to justify your trade (bottom to top):
- 1. Climate
- 2. Fundamentals
- 3. Technicals
- 4. Story
1: Climate (The Obvious Shit)
Let’s start from the top. First and foremost, you’re going to want to look at the climate that surrounds the stock. This is crucial for short term trades – if the market is in the middle of a slide, correction, or crash, it’s probably best to wait and get in at a later date. If the market sector is facing significant challenges (i.e. oil with rapidly expanding production and growing inventory) that are likely to weigh on the sector’s stocks, it’s probably a good time to wait or move sideways. If all is well and good – or if the market is experiencing a surge – perhaps a more aggressive than usual stance can be taken, due to a theoretically lower risk.
2: Fundamentals
Next, you want to look at the fundamentals of your stock. Even for the autistic orangutans here reading this, this is pretty damn easy – but it’s usually missing from DD posts anyways, so let’s break out the crayons. Yahoo Finance has pretty much all the information you could want under its Statistics and Financials tabs. Advanced autists can also search for 10-k’s, 10-q’s, 8-k’s, and, well, literally every type of SEC filing, with SEC.gov’s edgar search tool. Using this data to predict future cash flows, you can come up with a valuation for a company’s stock price. Or you can just look up analyst estimates and hope for the best.
How To Use Fundamentals while investing:
Fundamentals are not the essence of a good trade – the market is inefficient, irrational, and rarely ever trades shares at a fair market value. You will rarely, if ever, buy a yacht with gains from fundamental analysis. However, (this is the important part) a stock’s price will trend towards its ever-changing fair market valuation over time. This makes fundamentals very useful as a safety net or a measure of risk for short term trades. For example, someone who’s betting on a binary event to cause share value to go up is taking on less risk if the fundamentals suggest the price should continue moving upwards over time (whereas if fundamentals suggest the stock is overvalued, the trader will be completely reliant on the outcome of the binary to make a profit). They’re there, they’re useful, so use them.
3: Technicals
If the climate is appropriate and the fundamentals are comfortable, you’re in the clear to make an investment. However, we’re not investors here. Traders operate on a much shorter timeframe, which I could yap on about but I’m sure you’ve all already stopped reading at this point.
After using the market climate and fundamental analysis to predict long-term price trends, a trader should investigate the technicals. Technicals are the key to predicting short term movement. Where should we start? If you’re actually still here reading and taking this seriously, and don’t know the basics already, do yourself a favor and go binge-read Investopedia like it’s your favorite type of porn. Go educate yourself on SMA’s, EMA’s, RSI, Stochastic Oscillators, MACD, Bollinger Bands (use responsibly), candlestick charting and patterns, Fibonacci Retracements, and anything else you can find. Learn how to calculate them, and what they mean. Then, find a website or write a program to do the math for you (but again, make sure you know what factors they consider and what they mean, otherwise you’re probably just going to fuck yourself over by using them improperly).
How to use Technicals while investing:
Is the stock trending up or down? Is that trend likely to continue? How strong is the current price? Is the stock overbought or oversold? Etc etc. Technicals are the key to timing your entries and exits. Using them properly will make you a more successful trader, and referencing them in a DD will make your e-peen bigger.
4: Story (In Brief)
Finally, we arrive at what’s probably the most inexplicable item – and rightly so – the story. This gets real self-explanatory real quick: What the hell is making TSLA shoot up every time I sell it? It’s not the climate – auto makers are getting slaughtered. It’s sure as hell not the fundamentals – these guys aren’t making a profit, and their future cash flow is difficult to estimate. Technicals have no bearing here. But what does? Elon does, mother(musker?)fucker. The market is retarded and irrational enough that we can’t put a price on a Horatio-Algers story and some batteries.
Chapter 3:
”That was long as fuck and I hate you for it”
Indeed.
TL;DR:
If you’re going to make a DD post, actually do your due diligence. Tell us:
- About the market sector
- About the company’s performance
- About the stock’s performance
- About the retarded delusions you have of where this company will go in the future
Use resources like:
- Yahoo Finance and its many tabs
- sec.gov’s Edgar Search
- StockTA.com
- MarketWatch
- SimplyWall.St (for those of you who don’t like research)
- Investopedia if you actually want to be a decent investor and know your shit
- Financial Talkies: New generation AI platform that bridges the gap between technology and financial data
- Company Site: What they do
- Seeking Alpha: Latest “analysis”, Check if there is a VIC analysis
- Koyfin: Screen fundamentals
- Wikipedia: Read Story behind their company
- Check Dataroma how many are holding the company
- SEC Site: Read 10k and 10Q
- Literally anything besides your gut feeling or a shitty meme
I hope that, with effort, we at retail investors can come together to make better trades. At the end of the DD you will be able to answer these freaking things:
##Be capable of understanding
- [ ] Is this company inside my Circle of Competence?
- [ ] Are any of my Gurus buying or selling this company?
- [ ] What is my overall level of confidence with my research into this company?
- [ ] Describe the business and industry in one paragraph.
- [ ] Describe the challenges and economic cycles of this industry.
- [ ] What are the company’s plans for growth?
- [ ] Will growth peak within ten years?
- [ ] what are the business Risks?
- [ ] Ask yourself if you know what the market doesn’t
## Moat
- [ ] What is the Moat?
- [ ] How hard is it to compete with this company?
- [ ] Compare this company to its competition.
- [ ] What are the Big Four Growth Rates (Net Income, Book Value, Sales, Operating Cash)? Are they speeding up or slowing down?
- [ ] Does the company have enough cash to last several year if it looses money?
- [ ] How were sales and earnings during the last recession?
## Management
- [ ] Does the CEO have integrity?
- [ ] How candid is the CEO’s letter to shareholders?
- [ ] Does management talk freely to investors when things are going well but clam up or disclaim responsibility when trouble occurs?
- [ ] How happy are its employees?
- [ ] Does the company have any debt? If yes, could it be paid with one or two years of free cash flow?
- [ ] Has the company indicated that it plans to take on debt any time in the future?
- [ ] Is the management team buying or selling its company’s stock?
- [ ] Is the CEO much on social media, posts political views or hates short sellers (Red Flag)
- [ ] How are the Return on Equity and Return on Invested Capital Numbers of the year?