Never Buy a Stock Before Asking These 4 Questions

There are four questions I ask before I buy any stock. Most investors only ask two of them and that's why they lose money most of the time investing in the stock market. In this video, I'm going to share with you what those four questions are and how I've used them time and time again over 35 years to great success as an investor. And not only do I use these today and every day as an investor, but I use them as the CEO of a market maker and investment bank on Wall Street. And I also use them every day as an entrepreneur. So I think both investors and entrepreneurs or business owners are going to find this helpful if you have an open mind. I'm also going to show you what the kids today are calling a hack. It's a way to research a company faster than ever [music] using AI. And the reason I'm doing this and the reason I'm doing all these videos is I want to help you become a better investor, avoid some of the costly mistake that I've made over my career to learn these lessons. You know, the ones that gave me the gray hair. So, this is a four-step system I share with my friends. I try to teach my kids. Sometimes they actually listen. I know you see a lot of these videos on YouTube, but I leave I really believe you're going to want to save this one. The very first question I ask before buying any stock is, do I understand the business? First things first, I'm a bit too old to invest in things I don't understand. And let me tell you something, that's a relief. I don't have to know everything. You know, Bitcoin comes around, I don't touch it because I just don't understand it. A lot of other people do. And good for them. But if I can't understand something, I won't know how to evaluate it. I won't know how to tell you if it's a good buy or a bad buy. And that means I won't know when to buy it or when to sell it. And that means every time something bad happens, the price goes down or whatever, I'll panic. Then I'm going to start looking for people that seem to know more than I do on the subject. But because I don't know anything about the subject itself, I honestly can't say whether these so-called experts are idiots or not. And that becomes like a oneeyed king leading the blind scenario. And that's just something I'm not into. I don't want to be either of those two. It's a recipe for misery and anxiety. As Warren Buffett once said, "If I've had any success in my life, it's not because I learned how to jump over 8ft hurdles. It's because I learned how to walk over 1ft hurdles." What I've been trying to do my entire career, what I was taught to do is try to make the world less complicated for yourself. There are plenty of opportunities in areas you actually understand and that you're kind of really into. So, I like to focus on things that I understand. And that's something I teach my kids, you know, because I want them to think about business in a smart way. I don't want them to be suckers. When we go to a restaurant, I'm say, "How many people do you think there are here? What do you think the average check is?" You know, "How many people do you think this restaurant could serve per hour? How many hours of the day are they open?" Then we start talking about cost. You know, what do you think it costs to make this food? Uh what do you think it costs to buy it? What do you think it it costs to pay for the people who work here? On and on and on it goes. My goal is to get them to actually think about the business. But not every business is as simple to understand as a restaurant. Some are very complicated like quantum computing, data centers, cloud scaling, etc. So, here's something I recommend to all of my friends who ask me about it. Again, it's my big fancy AI hack. Next time you're thinking about buying or selling a stock, go to the AI of your choice, Clog Gemini GPT. Here's what I do. You know, I asked the AI, "Talk to me. Explain it to me like I was 5 years old. Who are its competitors? What are the risks to this business?" [music] Start by trying to understand the business like that. What you're really looking for here are companies that have a durable competitive advantage. A lot of companies have competitive advantages, but most of them are not durable. Meaning you can have a competitive advantage for a year. But durable means it lasts over time. It actually means two other very very important things. When you have a durable competitive advantage means the company has pricing power when it sells products or services. It can raise prices and folks don't really have a choice. Nvidia has a strong competitive advantage. But the question is is it durable? We're going to find out. A lot of people making chips now. Secondly, the competitive position is so strong. This is the other big thing. It means it's hard for other companies to attack. Back when I gave some lectures to college students, these NBA graduates, I always use Gillette as an example. I always kind of think about Gillette razors as kind of a great castle, really hard to attack, very easy to defend. Let's say you come in with your new razor company and you go to CVS or Walgreens. You're going to say to them, "Look, I got this greatest new razor company in the world. Oh my god, you're going to love it." And they say, "All right, we'll give you a shot." Where do you think you're going to get space on the shelf? Because Gillette and uh Shik, the duopoly that controls that, they basically dominate the top and the bottom. They might put you on the bottom. And let's say you realize that it's all about shelf space. You say to the owner of you, you say to the people who run Walgreens and uh CVS, you say, "Look, we'll give you five bucks back for everybody who buys our razor." Well, guess what? Even if you cut your price down to basically nothing where you're not making profits, guess what? Gillette could do the same. They will drop their price down, match you, blow you out, force you to spend that kind of money, make sure you're out of business, and then buy your parts for carcass, the part of the business. Go. I want a durable competitive advantage. So ask the AI this. Is the competitive advantage durable? Which other companies threaten that competitive advantage? Again, make this AI talk to you. Make the robot talk to you like you're 5 years old. The second question I ask is, am I comfortable with management? Now, here's something I've learned in my 35 years of doing this. Every public company on earth will hire an idiot to run it one day. So you want to invest in companies that are strong enough to survive the idiot cuz I promise you one day an idiot will run that company. So that's kind of what we talked about above for a bit. But I've come to learn over the 35 years that I've been doing this that generally speaking there are two types of broad CEOs. CEOs who understand what the primary objective of every business on earth is and CEOs who [music] don't. It's that simple. And that's what I found most surprising in my career is how few CEOs understand what the primary objective of a [music] business is. As a matter of fact, most really don't understand that game on a high level. Let's just say out of the 100% of people that are CEOs, [music] say 10% of them are complete idiots, right? And I'd say the 10% on the other side of the distribution curve are really smart. They understand what the primary objective of any business in any industry in any country on earth is. But 80% really don't. So what is the primary objective of any business, any industry, any sector, any country on earth, it's to earn the highest return on its invested capital? Full stop. That's it. Think of it this way. Every$,000 a company invests in itself every year, how much does it make back that year? Now, the average company in America has a 12% return on its invested capital. That means that for every $1,000 it invests in its business every year gets back about 120 bucks in profits. But special companies are the ones that earn higher rates of return on invested capital. For every $1,000 they invest in their business, they earn back 200, 300, or even $400. The best CEOs are focused on constantly how to improve a company's return on invested capital ROI. They are always focused on the two ways. The return side of the equation increasing revenue. The investment side of the equation lowering cost. Now there comes a time in every company's life when it becomes mature and it's generating so much money it can't keep investing all that extra money at high rates of return on its invested capital. So what does it do? A smart CEO will start buying back stock or issuing dividends. This is why we've seen Apple, Meta, and Google all do this. But dumb dumb CEOs, they'll take all that extra money. They'll invest it in businesses that are earn lower returns on capital. That's how they destroy those wonderful core businesses they have. Over the years, I've often asked myself, why would a CEO do that? And I think it's just the same thing that drove us in, you know, grade school. Some kids are just they need approval. Some kids have just mixed idea, you know, very human feelings, pride, ego, insecurity, so on. I don't want to buy stock in a company where the CEO has unresolved trauma from his childhood. So look, the company you're asking your a about, ask him what the company's policy is when it earns excess returns on capital. Does it return that money to shareholders? How? Question number three, what is the business worth? One of the biggest mistakes I've seen people make is the same mistake before I when I was young and before I learned the hard way. You know, I confused the stock of a company with the underlying business itself. A Toyota Camry could be the best car in the world, but is it worth $200,000? Is it worth a million dollar? A lot of companies are great companies. The question is, you know, what is it worth? Those are two very, very different things. I like GIF peanut butter. doesn't mean I'd pay $100 for a container of it. It's not worth that. So, there's a difference between the value of a business and the price of the stock. Those are two very different things. But, here's something you absolutely must know if you ever want to play this game intelligently. It's a secret. Every single billionaire investor who you've ever heard of, everybody who you've ever read about in the paper, everybody who you've ever wanted a copy, they all know this one secret. Okay? Every business has an intrinsic value completely separate from the stock price. A lot of people don't know that. They think the stock price is what it is. They compare it like to the real estate market in the short term. That's fake news. Not the way it works. You know, take Apple for example. 2025 revenue for Apple was $416 billion. It grew its business at $6.43% from the prior year. It's a mature business. Its profit margin still killing it at 26.6%. So basically 112 billion in profit. So basically for every dollar in revenue, Apple brings about 26 cents to the bottom line. So how do you find out what Apple is worth? You got to think of it like a private businessman. If we're businesswoman, if I were going to buy this company, if it didn't even have a stock, how would I determine what I should pay for it? Again, here you want to think of it like a real estate transaction. If you were going to buy a house that you knew you could rent out for $3,000 a month or $36,000 a year, what would you pay for that? Would you pay 600 grand, a million? Would you pay 20 million? Of course not. In other words, don't look at stocks like they're some intangible pieces of paper that just float in the cosmos that have nothing to do with reality. All that'll tell you is how much people are willing to pay for it at a given point in time. And during boom times, that means people are always paying more for things than they're worth. During bare times, they always get so scared they sell stocks for much less than they're worth, too. And let me tell you something, ladies and gentlemen. A market crash is always the best time to make money. It's like picking up money from the floor, but that's a vid for another video. So, how do we decide what a business is actually worth? Well, look, let me tell you. When I worked on Wall Street, I learned all these complicated mathematical models that were absolutely great. It's amazing. Discounted cash flow analysis, all this and that. You know, it's crazy. But it's not necessary for 95% of people here, okay? It really isn't. Anyway, that would come to be the next level of the game. This will give you the returns, 90% of the returns a lot of the smartest people on the planet get a billionaires get. Okay, so here's what I want you to do. Go to that AI you've been talking to about this company. What is the 10-year historical average price to earnings PE ratio on the stock? In the case of Apple, its 10year average PE is 26 12. Then multiply last year's profits by the average 10-year PE and voila, you start to get an intrinsic value for the business at whatever the silly market thinks it's worth on any given day. Or ask the robot to tell you, the AI, what the stock would be selling for today if it traded at its 10-year average PE. Again, that's going to give you a basic idea of what generally the market thinks it's worth over time. That's very, very important cuz again, I'm trying to get you to avoid complicated mathematical models, which we we could hold classes on, believe me. But this is kind of the shorthand way of doing this. You don't need to learn all these models at this point. Just learn the basics. All right. Now, fourth and final question is, what do I have to pay? Well, with Apple, Apple currently has a PE of 33.62. Its 10-year average PE is 26.5. That means a stock would normally be selling at about 210 bucks a share. But right now, as of this recording, it's selling for about 300. That's about 26% more expensive than Apple sells normally. We'll call that the AI premium. Now, you may be saying, "Ooh, Apple's going to be great. They're doing this whole new AI thing. It's going to be great for their revenue. Yeah. Yeah. Yeah. I'm sure it will. But how much revenue are you really going to add to a company, $400 billion company growing at 5 to 6% a year is growing at two times the growth rate of the US economy? Now, what I'm looking for in my life are bargains. I want to feel the way I feel when I go to a grocery store or a clothing store and I see something marked 50% off. I mean, come on. It's the best. You know, two for one. a Jiffy Peanut Butter. I've been on a peanut butter kick lately. Yippee. You know, those are the kind of deals that get me excited. So, if 210 is the normal intrinsic value for the stock, and remember folks, it's not an exact science. I say 210 is the normal intrinsic value, but I mean within a 10% range up or down, you know, we'll call it from 180 to 240. But if 210 is kind of the normal intrinsic value, 10-year intrinsic value for the stock, what I want to do is I want to buy things on sale cheap. And look, in a normal correction, maybe 20% that would bring Apple back to its uh intrinsic value or really close. But again, for me, that really isn't good enough. It's not really in my strike zone. I mean, look, in a bare market like 2009, oh my goodness, that was great. Apple would would be selling literally for half of this price, 110 bucks a share and that's how you get rich. [music] Even during the COVID crash, which was great for us, it dropped to, you know, 18 times earnings, you know, it was great. So, it was cheap. It didn't get 2009 world's coming to an end cheap, which is the greatest time I've ever had an investor. But it got co cheap, which was pretty good. So [music] look here at CO bargains, you're buying at 30% below the average P uh price to earnings ratio. That's like buying a dollar for.7. 2009 is like buying a dollar for 50. You load up the boat. You know, this is what I did in 2009. I bought all my favorite stocks at the cheapest prices I've seen in a very, very long time. That's what's great about crashes. Anyway, what those four questions will help you do is increase your investing batting average. And that is how you get good at this game. Period. I hope you found this video useful. I hope you save it and use it for future and reference it. If you want a list of 40 companies that fail all of those four questions, I mean, strike strike strike strike just join us. Sign up for Dylan Zyrie. It's free. >> [music] >> Hey, hey, [music] hey.