Choices Choices

My method for selecting companies to invest in has been rather random in the past. Too lazy to do a full analysis (it is so tedious when you don't understand all the accounting jargon) I have relied on recommendations, simplistic logic and hunches. While this approach has served me well, I think it would be irresponsible to carry on like this, especially now I understand a bit more of the accounting stuff, and am investing in different companies more regularly.

However defining and following a share filtering process would be too boring. Anyone can do that mechanically using share screening sites. No, what I need is a checklist so that when I decide to invest in a company for the first time I can check that I have at least done the minimum due diligence. So here is a first attempt:

1. Do I understand what the main revenue streams are? For some companies this is obvious. You don't have to be a genius to know that Tescos makes its money be selling groceries. But others are a bit less obvious (to me anyway!) Cable & Wireless? Leasing their network maybe? Arm Holdings? Selling their processor designs? Many companies these days have multiple types of income streams. It is important to know what they are and how important each one is.

2. Do I understand the share price chart for the last 2 years? Having a falling share price is not necessarily a problem. Not understanding why the share price is falling is a big problem. I am not a chartist. I prefer buying shares that have recently fallen to ones that have recently risen. But unless I understand what has made the company fall out of favour I am playing with fire. Think Jarvis.

3. What is the plan for the shares? Obviously the plan is for the share price to rise! But is this a short term recovery play or a long term buy and tuck away investment. I recently bought shares in British Airways as it seemed clear that the shares had been oversold. This was a recovery play. Holding shares in BAY for years at a time seems unnecessarily risky. But making a short term profit as the share price corrects itself is fine with me. On the other hand I bought quite a few Vodafone shares about a year ago. In the year I have had them they have gone nowhere. But I am prepared to wait - VOD is a true "buy and almost forget" stock.

4. Have I read the latest yearly report? This isn't always fascinating reading but as well as all the financial data this can contain valuable nuggets of information about the company which may change the way you view the company.

5. What is special about the company? As a personal investor you have thousands of companies to choose from. What is it about this company that makes it stand out? Are you sure there aren't better companies in the same sector?

Well that is a good start. If I follow this checklist I might feel a bit less irresponsible when my choices blow up in my face!