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14.5: Research

Last updated

Apr 4, 2025
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- 14.4: Strategies
- 14.6: Formulas and Metrics

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Learning Objectives

Objective 1
Objective 2

Research – From Guesswork to Groundwork

Alex once admitted she had spent more time researching where to get the best burrito in town than she did choosing her first investment. Jordan laughed—until he realized he’d done the same. That moment led to a question every intentional investor eventually asks:

How much research is enough to make a smart financial decision?"

You don’t start as a market expert; you start by being curious and protecting your future self. This section is about building a foundation—not for Wall Street, but for your street. Research is not an intimidating wall of numbers. It’s a habit of asking good questions and interpreting useful signals.

What Research Really Means

You’ve met the instruments. Now it’s time to learn how to look inside them.

Research means getting to know what you’re buying—and why. It’s about going beyond the ticker symbol to understand the engine behind the investment. And just like with people, a few good questions can tell you a lot:

What does this company, bond issuer, or fund actually do?
How does it make (and keep) money?
Who’s managing it—and can you trust their track record?
What happens if things go wrong?

Imagine browsing stocks like window shopping. If you only give two minutes of attention before investing, and your time is worth $15/hour, then you’ve spent about 50 cents of mental energy. Would you expect that level of research to deliver above-average results?

Research begins with curiosity, not expertise. It’s about slowing down and asking: What am I getting into? Later in this chapter, we’ll look more closely at the tools and calculations that can help you answer that question with confidence.

Researching Stocks – Peeking Behind the Ticker

Stock research starts with the story. What business is this company in? How does it make revenue? Who are its competitors? Then come the numbers:

Earnings

Is the company profitable?

P/E Ratio

How expensive is the stock compared to its earnings? A very high ratio may suggest overvaluation—or optimism. A very low one could mean undervaluation—or a problem.

Dividend History

Does the company share profits with investors? Has it been consistent or erratic?

Reports like the 10-K or annual summary help, but so do earnings call transcripts and analyst summaries. Even reading one thoughtful article can add layers of insight. We’ll dive deeper into interpreting these numbers in the next section, but for now, know that these are the breadcrumbs that point toward a company’s financial health.

Researching Bonds – Assessing the Borrower

When you buy a bond, you’re lending money. The research question becomes: How likely is it that I’ll get paid back—and on time? Key signals include:

Credit Ratings

Moody’s or S&P: These help assess default risk. AAA is the safest; anything below BBB is considered junk or speculative.

Issuer Type

Government bonds are often safer, while corporate bonds carry more variation in risk.

Yield vs. Risk

A higher yield might seem tempting, but it often reflects greater risk. Ask: What’s the catch?

You don’t need to run a full credit analysis. But knowing the basics can help you avoid reaching for yield without recognizing the risk. (In the next section, we’ll break down how to calculate yield and compare bond types.)

Researching Funds – Reading the Recipe

Mutual funds and ETFs bundle multiple investments. But who chose what goes in the basket—and why? Good research focuses on:

Fund Strategy

What’s the fund’s objective? Is it focused on growth, value, income, or a specific sector?

Holdings

What companies or assets are inside? Do they duplicate other investments you already own?

Turnover Rate

High turnover can lead to higher transaction costs and tax consequences.

Expense Ratio

What are you paying for this fund to be managed?

Some investors choose a fund based solely on its name or past performance. But deeper research reveals whether the fund truly adds diversity to your portfolio—or if it just adds clutter. Later in this article, we’ll explore how these factors affect overall cost and return.

Researching Alternatives – Appraisals, Comps, and Context

Real estate, collectibles, and other alternatives require their own lens. With real estate, it’s all about comps—comparable properties—and trends in local demand. You’re asking:

What are similar properties worth?
How is the market moving in this area?
Who’s managing the asset, and what’s their history?

For real estate investors, appraisals provide an objective valuation, but those numbers often rest on local trends. Market momentum, vacancy rates, and zoning changes can all influence future value.

With collectibles or non-traditional assets, research means vetting authenticity, assessing rarity, and understanding buyer sentiment. This kind of research is less about balance sheets and more about trust, verification, and contextual signals.

Behavior and Bias – The Hidden Research Hurdles

The biggest threat to research isn’t ignorance—it’s narrative bias. We’re emotional creatures trying to survive in a numbers-driven world. Our brains crave clarity, stories, and shortcuts—which means we’re vulnerable to behavioral traps that can shape our decisions before we even know it. Some common traps were covered in the Market Behavior chapter:

Recency Bias

Giving too much weight to the latest headlines. A dramatic event from last week might feel urgent, but investing requires a longer lens.

Herd Mentality

When everyone’s buying, it’s tempting to jump in. But the crowd doesn’t always know where it’s going—or why.

Confirmation Bias

We naturally search for information that supports our existing opinions and ignore what doesn’t. That’s not research—that’s reinforcement.

Overconfidence

Doing your homework is important—but it doesn’t guarantee success. Even the best research must live alongside humility.

Analysis Paralysis

Waiting for the perfect set of data can become its own form of procrastination. Sometimes, progress comes from making the best decision you can with the information you have.

Market behavior is driven by these patterns more than we often realize. The prices we see reflect not just company performance but the collective emotions—fear, greed, optimism, doubt—of thousands of participants. The awareness of bias is itself a form of protection.

The next time you catch yourself making a decision that feels automatic or emotional, pause. Ask: Am I reacting, or am I reasoning? That habit alone can put you ahead of many investors.

Building a Repeatable Research Habit

Research doesn’t have to be an all-or-nothing sprint. You can build a rhythm:

Scan company or fund news once a month
Revisit your portfolio quarterly
Set alerts for major news or price swings
Keep a personal "why I bought this" note for every investment

Over time, your instincts improve—not because you got lucky, but because you got intentional.

Research is how you go from reacting to planning. It’s how you shift from investing based on noise to investing based on knowledge.

And it all starts with curiosity—and protecting your future self. Our the next section will demystify the key math and metrics that make all this research even more actionable.