Financial Due Diligence Part 3

"Never invest in a business you cannot understand"

Let’s start today with a quote from Warren Buffet, “Never invest in a business you cannot understand”.

I know there is this constant struggle to make money very early in life. At a point in my life, I wanted to retire at 30 (The vision is still possible. lol). So, I understand the need to invest in ventures that promise a 100% return in 3 months. However, this is one thing you must understand, business is an exchange of value. No business makes money without offering anything in return. All businesses make money by providing value at a premium price. That forex company you want to invest in must be managed by someone who is skilled in the business, experienced in the field, and certified.

The focus of today’s newsletter is technical analysis. Technical analysis is understanding the business drivers, metrics, and analysis. Let me explain what it means in clear terms. It is the analysis of the price and volume of the business. If you want to understand any business, you have to understand the drivers.

Is Apple a volume, price, or both business? What about MTN, Dangote Cement, Food, Payment service, Microsoft, Gold, and Oil businesses? This question must be at the forefront of any entrepreneur and investor. It is crucial to everything. If the driver of a restaurant business is volume, what are the factors that can reduce or grow the volume? There is a science to every business, and it starts with you understanding how the business makes money.

Another important thing that people don’t pay attention to is cost. In yesterday’s newsletter, I told you investors are the last set of people that get paid in an investment. It simply means you have a number of stakeholders the business needs to settle before the investor. A profitable business is not only a business that makes money but also knows how to spend money. Always check out the cost implications of your investment. A business can make 10 million dollars in revenue and spend it all on ridiculous things and projects. If you don’t believe it, read my article on WeWork.  If you want to buy a plot of land in the city centre, what are the costs attached to the purchase? As an investor planning to invest in a business, you must know what expenses the business is incurring, and the value derived from those costs. By the way, costs can be financial and non-financial.

Photo by Isaac Smith on Unsplash

Lastly, never ignore past activity. “They are a valuable tool for predicting future occurrences. Technical analysis can be applied to any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities” – Investopedia. You must attend to volume patterns, price trends, and market sentiments. What happens when MPR is increased? what’s the effect of devaluation on the business? History, if we are not careful, tends to repeat itself.

Always have this at the back of your mind. If you won’t offer your body to the mechanic for treatment, why give your money to a random stranger to double?

Do me a favor if you enjoy this newsletter, share it with family and friends.

In tomorrow’s newsletter, I will share all the information you need to know about Ghana and the latest crisis with their bond repayments.

Cheers to a profitable lifestyle,

TL.