I had a friend that used to say there are no dumb questions, only dumb people. This wasn’t helpful (and it may have hurt my feelings a little). When it comes to microinvesting, the important questions for making decisions are no different than investing through any other means. So instead of worrying about your intellectual status, adopt the approach of asking a lot of questions. And while the only dumb question might be the one you don’t ask, asking the right questions about your investments can make things a little easier. Here are four basic Qs you’ll want to A:
1. Does this business have a track record? If it does, then what does it reveal? What does past performance indicate about the future? “But what if this is a new venture?”, you say. Well, the project or company may not have a track record, but the founder always does. Push a little deeper into the people behind the venture. What do you find?
2. Is there current or long-term debt? If so, how does it compare to the productivity and equity of the business? For example: How big of a financial hole are they in and how fast are they climbing their way out. This deserves a little more information, so be prepared to geek-out on debt-to-equity ratios in a future issue. For now, think about how much debt is currently in place and whether or not it seems reasonable.
3. What are the profit margins associated with the business or project? How do they compare to similar ventures? Ok, so maybe this question deserves a little more insight into what profit margins are and how to evaluate them. We’ll add it to the list. In the meantime, just remember that if what goes out exceeds what comes in, there’s a problem (without a solid plan to change that).
4. How is this outfit positioned in the marketplace? How are they differentiated from similar companies offering similar solutions? Check out some deeper insights here and here. Are they playing in a longer-term, stable market or an emerging market? Or, are they soaking up profits in a space that’s on its way out?
There you have it. These are fundamental questions to ask about the health of the business you’re investing in. The funny thing is, when it comes to conventional investing through 401Ks, IRAs, mutual funds, etc. most people don’t ask these types of questions. Maybe that’s because the answers are hard to find and most people don’t have time to dig. Beyond digging, they certainly don’t have an option to interact with someone at the company, let alone a key leader within the organization.
If you are someone that has followed more traditional routes, we’re not advocating that you fully vacate your current strategies. We’re simply noting other options we don’t want you to miss out on. We also want to arm you with the right resources to make good choices on these new investments. Read through the live campaign page with the questions above in mind. Then check out the Q&A section and if you don’t know the answer to one of your questions, just ask.