DD's

When you hear the expression Double D's, the more perverted of you gentlemen may be thinking woo  hoo!!! But that is not the kind of Double D's I am referring to. Due Diligence is the kind of process you should go through if you are contemplating making an investment in something or just entering an agreement or transaction with someone else.

Did the "victims" in this article do their due diligence? For those of you who have been living under a rock for the last four years or who have no interest in international business/crime let me just give you a quick background to the Madoff scandal. Bernard Madoff ran a huge Ponzi scheme worth 10's of billions of dollars and in the end was caught and is now serving a 150 year sentence in jail.

What's a Ponzi scheme? A Ponzi scheme is when investors are paid out money by money coming in from new investors so that they seem to be getting huge returns but in fact their investment is not being invested legitimately. You can find out a little more about Ponzi schemes here. This particular link talks about another American who is also serving a long prison sentence for running a Ponzi scheme.

What should you do if you want to invest in something? Let me give you ten ideas:

1. Understand the industry. Warren Buffett does not invest in anything he doesn't understand. This is why he didn't get caught up in the tech bubble. He just doesn't understand the tech industry.

2. Look at the company's revenue and profit. What is the general trend? Apple would have been a good  investment. Maybe still is although I don't know too much about fruit companies. (Thanks Forrest)

3. Who are the competitors in the industry? Finding out who they are and how saturated the market is will help you work out if the company has a future.

4. What do the numbers say? What is the P/E ratio and all those nasty little things that are so important to the whole system?

5. Does the company have high personal ownership by the board? If it does then they must be doing something right and that is a good thing. Ownership by other institutions is a good thing as well.

6. Have a look at the company's balance sheet. Does it have a significant amount of cash to pay of some liabilities? What is the debt/equity ratio? Debt is not a bad thing if it is being used to build up equity.

7. What are the risks involved in the investment? If you have someone advising you to go for this investment and they don't explain the risks properly, I suggest you run a mile as quickly as possible.

8. If the investment requires regular installments you better do some due diligence on yourself to figure out whether it is appropriate to sink in some of your hard earned money. i.e. Do you have enough money to fall back on if it all turns to custard.

9. If you are buying direct stock/shares, find out what the price has been over the last few years. It will give you an indication on where the company is heading.

10. Does the guy investing your money live in a huge house or 3 storied apartment or both and seems to have more money than everyone else you know, combined? if so, tread carefully.

You have worked hard for your money, do you really want to lose it to an unscrupulous human being whose sole motivation is greed? Do your double D's and you may be able to get some extra sleep at night.