Due diligence is absolutely critical when you’re considering any type of investing—even buying bonds or investing in the S&P 500. However, you also need to consider how much due diligence you can feasibly do and how much you’re willing to do. Those factors often depend on the amount of money you’re considering investing in any particular opportunity.
For example, suppose you have $10,000 to invest. Frankly, that’s not a lot of money to invest, so you have to limit what you’re going to invest in. With $10,000, you might get a good return by simply investing in publicly listed securities (that is, the stock market) and hope that those investments work for you. For instance, you could buy stock in
the Coca-Cola Company, which is a fairly safe investment because you know Coke is sold all over the world. You do not have to go to Atlanta to visit the Coca-Cola headquarters and see how Coke is made and bottled and marketed and sold to determine whether buying stock in the company is a good idea. So that investment should make you really comfortable,and you’re probably not going to get burned, unless
you don’t know anything about Coca-Cola. That, of course,is the Warren Buffett approach: He invests only in what he knows.
Although Warren Buffett is a good role model and certainly a successful investor, his risk profile is very different from yours and ours. He can toss a few million bucks away, and it wouldn’t make any difference to his overall wealth, which was recently estimated at $50 billion. But if you
have only $10,000 to invest, then $1,000 is a lot of money to you, and you wouldn’t want to lose 10 percent of your investment. So if you’re a $10,000 investor, you have to be extremely careful about how you manage your money. You need to know exactly what you want to do with it, you need to know how to use it in the best way, and you need to decide
how much time and effort you’re going to spend doing your due diligence on potential investments. All of those factors limit what you’re going to invest in.
That’s also why it’s important to focus on investment opportunities
that are local to you. You should invest in something that you know, with people whom you know you can trust in terms of their decision-making capabilities regarding what they invest in or the advice that they give you. In Jen Disning’s case, she got to know and trust Bob the water
broker. As mentioned, her initial investments were $10,000. But she had enormous power with her $10,000 because she invested in a local water broker, and she could see what he could do. She could drive out to the property that was being purchased, see the water being produced, and see where that water was going. That research didn’t cost her a heck of a lot
of money. She did spend a lot of time, and time is really the most valuable commodity we have, but Jen’s investment of time was reasonable. The company she was considering was local, so the amount of time she spent was relatively low in relation to the amount of gain she hoped to have from her investment.
