The Best Questions To Ask When Investing: Part 2

Over the past 10 years, I have probably read about a hundred books or so on investing. However, I have found it hard to retain much of the content in most of the books.

That’s because after I had gone through 10 books on investing, I realised that most investing books seem to be repeating the same concepts and ideas.

However, there is one book that is embedded in my mind like how a sticky chewing gum gets stuck to the sole of a shoe. This book is one of the first I ever read and the best investment I’ve made so far. It is Common Stocks and Uncommon Profits by Philip A. Fisher.

One of the most valuable insights I got from the book are the 15 questions that Fisher himself asked when analyzing a company. Till this day, I continue to ask the same questions about every investment I’m making. So far, the 15 questions have been very profitable for me. That is why I want to share the questions, along with my thoughts on them, in a series.

I’ve covered the first three questions here. Here are the next three.

Question 4: Does the company have an above-average sales organization?

A company can have the best product in the world, but without a great sales and marketing team, its product would never see the light of day. Therefore, investors need to investigate the sales process of a company and see if its sales team is effective at selling.

Question 5: Does the company have a worthwhile profit margin?

This may seem like a basic question, but you will be surprised at how many companies pursue revenue growth without thinking about their profit margin.

Very often, companies get caught up with boosting their revenue no matter the cost, even when they may be making negative margins on the new revenues. So, this simple question is a test for us to see if a company has sensible management who focuses on making a profit.

Question 6: What is the company doing to maintain or improve profit margins?

A company having a good profit margin now is not the most important thing. It is far more critical for the company to have a plan to maintain or even improve its margins.

A pharmaceutical company with a patented drug may be enjoying high margins at the moment. But, if it does not have new patentable drugs in its pipeline, its margins would be destroyed after its existing patent expires. Therefore, we need to investigate if a company has the ability to maintain its profit margins in the future.

Foolish Summary

Fisher’s 15 questions are essentially a checklist for us to think about when analysing a company. The first three questions focus on a company’s future potential. The three questions featured above deal with how well a company can generate profits for its shareholders. As investors, we need to ensure the companies we invest in can maintain or improve their profitability going forward.

Stay tuned as I explore the rest of Fisher’s questions soon!

Editor’s note: The next part of the series reviewing the seventh question has been published. It is found here. Articles featuring the eighth to 13th questions have also been published. They can be found here (eighth and ninth), here (10th and 11th), here (12th), and here (13th).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.