Invest in What’s in Front of you: The Business Model

Invest in What’s in Front of you: The Business Model


The two basic questions to ask yourself when first reading about a companies business model is…What does it really do, and how does it make money?

To understand how a business operates, read the business description found in the annual report. If you find this too daunting a task, go to their website and poke around there. A good company who wants to attract investors should make their information transparent, understandable and easy to access.

What products and services are being offered? 
Who are the customers the business is offering their products and services too?
What specific customer needs are being filled by the products and services the business is offering?
How much do the customers depend on what the business offers?
How big and growing is that particular market?  
How many competitors are there in the companies targeted market?
How strong or entrenched are these competitors?
How does the business plan to make money from their product and service offerings?
How does the company plan to grow its business?
How does the company plan to control the costs of operating its business?
How much does the business depend on their own suppliers? 
What is the nature of the relationship the company has with its own suppliers?
How has the business evolved over time?

Answering these basic questions is always best. Remember to focus on the companies customers, competitors and suppliers. Keep things simple and clear. Understand the broad brushstrokes because the devil is in the details. And remember about the 'marginal utility of information'. Focus on the basics you need to know. Use your intuition. How does the description of the companies business model feel to you. Read the companies letter to the shareholders. Is it easy to understand? Does it leave you with any particular impression?

Read Management's Discussion & Analysis (M,D&A) of their business. There you will find disclosures regarding recent developments, trends, products, competition, and financial position of the company you’re interested in. There are legal filing requirements that management must adhere too, so they’re much more apt to be honest and deliberate in their discussion of the companies’ prospects than they are in the media.