The principles of money

“Don’t invest in what you don’t know. Learn first then invest.”

Robert Kiyosaki

            Investing can be very exciting when things are going up and to the right.  When your investments are going down it can be very scary and challenging to stay the course.  When events like recessions¹ happen, it is important to still feel secure in your thesis and the investments you have chosen. Here are five questions to ask yourself before investing your hard-earned money.

How Does the Company Make Money?

You need to know where the revenue is coming from.  For example, Tesla, Inc. (TSLA) makes money from leasing and selling electric vehicles as well as selling electric generation and storage systems. Tesla’s automotive unit makes money selling in-app upgrades, in house financing and service plans for their vehicles.  Their electric generation and storage unit makes money selling solar panels and batteries for energy storage to residential, commercial, and industrial clients. Look at a companies profit and loss statement (P&L Statement)² to see where their revenue comes from.

Is the Company a Leader in Their Industry³?

Everyone has competition. Does the company have a clear advantage over their competitors? Tesla is a leader in the electric vehicle (EV) market.  According to Cox Automotive, in 2022, of all electric vehicles sold, 62% were Teslas.  If a company is not a leader in their industry, do they have the potential to be? A great place to hear about an organization’s market share⁴ and their plans to increase it, is during their earnings call⁵ to investors.  Look at the company’s website usually at the very top or bottom for the investor section. This is where you will find the latest earnings call, presentations, and SEC filings.

What Do You Know About the Leadership of the Organization?

A founder or CEO needs to have the ability to move the organization to profitability and growth.  In keeping with Tesla, Elon Musk is a polarizing CEO who has founded Zip2 (sold for $300M to Compaq Computer Corporation) and X.com, an online bank which merged with what would later be known as PayPal. In both Zip2 and PayPal Musk was removed from the CEO title by the board of directors for more experienced leadership.  Judging by his antics with Tesla and now Twitter (which Linda Yaccarino has recently been tapped to lead as CEO) it is a wonder if his best qualities have always been some of his worst.  Research where the CEO was prior to leading the organization you are interested in.  How did the company do while under their leadership?  What is the consensus among other investors?  This can be found in investor forums and analyst research reports.

Can This Company Expand Over Time?

Most companies have a research and development department (R&D) whose job is to come up with products and services that can advance the company in growth.  The company should be evolving along with the way of the world.  In 2022, according to the SEC, Tesla’s R&D⁶ budget was around $3 billion. Tesla spends more on R&D than any other car maker. Learn what their R&D department budget is and some of the things that they are (rumored) to be working on.  Earnings calls are a great source of finding this information.  Pay close attention to the Q&A session. Analysts often ask a lot of forward thinking questions about the company’s future growth and earnings during this time.

How Do I Get My Money Back?

This is a very easy question to answer when it comes to stocks.  Pressing the sell button in your brokerage account releases your money (hopefully the gains too) back to you.  In other forms of investing, it can be more complicated.  If you are investing in a small business or start up there is most likely a lock up period⁷.  This should be something that you are aware of ahead of time.  Make sure that you have the terms agreed upon, written down and notarized.  This is similar to a promissory note⁸ issued by a bank. Most scams and Ponzi schemes have an unclear process when it comes to getting your money out of an investment. Know the process and make sure it is standard practice. Ask a lot of questions and don’t be afraid to walk away if it sounds too good to be true.

Glossary of Commonly Misunderstood Terms:

1. Recession– a decline in economic activity caused by a widespread drop in spending.
2. P&L Statement– a statement that shows a company’s revenue, cost and expenses over a period of time.
3. Industry– The sector of an economy (ex. the US automotive industry, is a sector of the US market)
4. Market Share– The percent of total sales in an industry generated by a specific company.
5. Earnings Call– a call between management and investors to discuss the company’s financial results over a certain period of time.
6. Research and Development (R&D)– A team or department tasked to improve goods and services.
7. Lock Up Period- a timeframe where investors are not allowed to sell or redeem their share of an investment.
8. Promissory Note– a debt note written by one party to pay another party at a certain time, a specific amount by a certain date.