Question by DON: What is the term “understanding a business” mean?
Warren Buffet always says in his interviews, “Unless I don’t understand the business completely, I won’t invest”. What does he exactly mean by the term “Understanding a business” here.
Can I someone explain cleary?
Answer by G D
“understanding a business” usually has to do with the business plan and the more basic aspects. These include type of company (auto, restaurant, manufacturing, etc.). It is also important to know how that industry is doing (the auto industry is suffering right now). Some more basic information includes past performance and stability of the company (McDonald’s may occasionally go down, but its value over the long run has always gone up). The most important thing is the business plan which is the future plans for the company. A brokerage or TV show or stock report or online investment site can help you with this. It tells you what the company plans to do and how to do it. It is important to also read analysts reports because companies are trying to make themselves look good in a business plan, so it may be misleading.
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