5 questions every investor should ask before buying a stock (but most don’t)

These are all good questions and likely already embedded in your investment process. But what about the ones you’ve never thought to ask?

Hamish FitzSimons - AllianceBernstein

Hamish's question - “Are large super funds overweight or underweight this stock?”

That can matter more than valuation in the short term. As super funds move closer to benchmark weights, stocks they are underweight can benefit from sustained buying, while overweight positions can face selling pressure. 

CBA is a good example. Despite concerns about valuation, many funds were underweight and needed to buy shares to catch up with the index. As the share price rose, CBA's index weight increased, forcing further buying to close the gap. This created a self-reinforcing cycle that supported the share price despite the challenging valuations.

Will Mumford - Auscap Asset Management

Will's question - “How satisfied am I as a customer of this business?”

This question helps to support my intuition regarding the defensibility of the company’s value proposition and how this is changing over time. It also filters out businesses which are either outside my circle of competence or which are winning today by acting against their customers’ best interests, which ultimately impacts shareholder returns. 

One example is Sigma Healthcare, the owner of Chemist Warehouse. Chemist Warehouse has grown through offering its customers (including me) genuinely differentiated range, value and quality – which keeps us all coming back for more.

David Tuckwell - ETF Shares

David's question - “Is the trend your friend?” 

This is the question we constantly ask. Fundamentals come second in our view. The history of the stock market is clear: you can be right about the fundamentals, but if the market doesn’t agree with you, you will still lose money. 

Fighting the trend is usually a fool’s game, particularly in an era when multiple expansion has become an increasingly important source of returns. So we are less interested in building valuation models and more interested in identifying momentum. As Keynes observed, markets can remain irrational longer than you can remain solvent.

Michael O'Neill - IML

Michael's question - “How have the management incentive hurdles changed?”

Changes in management incentives often don’t get the attention they deserve. Most investors read the remuneration report once, tick off management alignment, then move on. Good alignment incentivises the right management behaviour for the benefit of shareholders. 

However, a change in incentives is a strong signal too. Boards do not move the goalposts lightly. If the hurdle goes up this suggests that the board believes the business can clear a higher bar. If it goes down this implies management has won the argument that the outlook is tougher, even if their strategy slide still says they are confident.

Leon Rapp - Platinum Asset Management

Leon's question - “How could long-term structural themes change the size of a company’s addressable market?”

Long-term themes should be incorporated into stock picking. Incremental technological innovations can lead to breakthroughs that profoundly shift market size. These may not meaningfully impact near- or mid-term earnings but could dramatically alter a company’s long-term total addressable market (TAM).

Industrial robotics is a good example. The productivity benefits of factory-floor robotics have been understood for decades, but adoption beyond traditional automotive industries has been constrained by physical limitations. Now, AI, combined with advances in sensors and machine vision, has the potential to transform robotics into a cost-effective, flexible, reliable and increasingly autonomous production input, paving the way for significant industry growth.

Not every company will succeed. During major technological transitions, the ability to anticipate change and execute a clear business strategy can separate the winners from the losers. The assumptions are always debatable, but these are precisely the long-term questions we believe are critical to stock picking.

Do you have a surprising question you ask before buying a stock? Share it in the comments below.