Is there any point trying to do in-depth research on companies whose shares you're considering?
You may think the obvious answer here is a resounding "yes", but this is an issue that splits the private investing community.
On the one hand, you have the "numbers only" approach beloved by value investors who refuse to let themselves get drawn in by a company with a good story to tell, or any other information which they see as extraneous to the value case.
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On the other hand, there are many successful private investors who make a point of being more thorough and active in their research than pretty much anyone else.
A great example
One such example is a private investor named "David". David is well known for the thoroughness of his research. He often finds innovative ways of turning over the stones on a company, sometimes posing as a customer, or encouraging others to do the same.
His meticulous approach pays off. Since October 2011, his top six investments have enjoyed a mean average increase over 25%. Over the same period, the FTSE has added 1.3%. Not one of his six has lost ground. His actual performance has been a lot better than 25% as his largest holding has put on over 70%.
If I may place the larger Nautical Petroleum (LSE: NPE) and FW Thorpe (LSE: TFW) to one side for a moment, the average market capitalisation of the rest is just £34m. The relatively small size of the companies in this portfolio is the key here, for me. With large-cap companies, you're unlikely to be able to gain a real edge on the market as they're analysed to the nth degree. So, in these cases, the numbers-only approach helps iron out Mr Market's mood swings and can be an excellent way of gaining an edge.
And the same basic information is out there with small-cap companies. But once you've had a look at the last five years' worth of accounts, the company's products, R&D, patents, directors' CVs, market share, assets and so on, and formed a basic view, there are ways of going a lot further.
But how do you go the extra mile in really getting under the skin of a company and judging for yourself what its prospects are?
Here are a few suggestions:
Go to the AGM
One straightforward way of digging deeper is to attend the company's AGM and ask a few questions. Don't be too diffident in asking questions that may make you look more foolish than Foolish. After all, if you don't understand a company's performance and prospects, perhaps you shouldn't be investing?
Get on the phone
Another way is to ring up and ask any questions you have. From personal experience, I know you will need to be persistent here, but if you are, you'll usually end up talking to the CEO or the FD.
Be a customer
Being a customer is an excellent way of assessing a company's prospects if you can do it. If not, you may be able to ask real customers what they think.
Look for the clues around you
Investing legend Peter Lynch says that the clues are all around us. Staff, customers, suppliers, lawyers, accountants, advertising agencies, contractors and others may all have clues that a company is going well before the market does. Talking to these people is an excellent tactic if you can find them. This will help give you a good feel for trading and prospects.
If possible, visit the company's sites. If you're interested in a property's potential valuation, this is particularly useful.
Don't be a fool in love
Remember during this process never to "fall in love" with a share. This is the inherent risk when going into such research detail with a company.
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A version of this article, written by David Holding, originally appeared on fool.co.uk