14.5: Research
- Page ID
- 134226
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- Distinguish between qualitative and quantitative investment research.
- Evaluate common sources of financial information and potential biases.
- Recognize how research supports strategic clarity and confidence.
Research - From Guesswork to Groundwork
Alex once admitted he had spent more time researching where to get the best burrito in town than he did choosing his first investment. Jordan laughed at first, until she realized she’d done about 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 can 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. A few good questions can tell you a lot:
- What does this company, bond issuer, or fund 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?
Think of browsing stocks like window shopping. If you only give two minutes of attention before investing, and your time is worth $30/hour, then you’ve spent about one dollar 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? You will be able to answer that question with confidence once you understand these tools and calculations.
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?
Price-to-Earnings (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 SEC 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. In the next section, we will look more closely at these numbers. You will find they are good indicators of a company’s financial health.
Researching Bonds - Assessing the Borrower
When you buy a bond, you’re lending money. The research question becomes this: How likely is it that I’ll get paid back - and on time? Check all the key signals:
Credit Ratings
Moody’s or S&P 500: 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 avoid reaching for yield without recognizing the risk. In the next section, we’ll demonstrate how to calculate yield and compare bond types.
Researching Funds - Reading the Recipe
Mutual funds and ETFs bundle multiple investments. But who chooses what goes into the basket, and why? Good research focuses on these questions:
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
How high is the turnover? Is high turnover leading 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. Additional research can reveal whether the fund adds diversity to your portfolio or adds clutter. Later in this section, 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 need to ask these questions:
- 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 rely 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 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. We are 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; it is 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 of fear, greed, optimism, and doubt of thousands. Awareness of bias is itself a form of protection.
The next time you make a quick decision that feels automatic or emotional, pause. Ask: Am I reacting, or am I reasoning? Pausing to reflect or reconsider 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 will improve. It's 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 the knowledge to protect your future self. The next section will demystify the key math and metrics that make all this research even more actionable.
Good decisions rely on good information. This section helps students move beyond hype and guesswork by emphasizing the value of thoughtful research. It introduces tools and mindsets for asking better questions and interpreting the answers.
- Reading company reports, analyst opinions, and performance metrics
- Understanding qualitative context - news, leadership, industry trends
- Questioning bias and narrative in media and social platforms
Research is not about perfect prediction; it's about consistent preparation and becoming a critical thinker, not an information hoarder.
- Think of a time you acted on limited or one-sided information. How might better research have changed your outcome?
- What makes certain sources feel more trustworthy, even if they’re less reliable?
- Choose a stock or fund and describe one qualitative and one quantitative insight you would look for before investing.