Know what you are Investing In Warran Buffett says, “Never invest in a business you cannot understand. Risk comes from not knowing what you're doing.” He also practices it by not investing in a business that can not be explained on a single sheet of paper. There is a reason he said these things. Many of us invest in something because of the name brand or a business that has received a lot of hype. We might have a friend or coworker tell us about a stock that is going to shoot sky high or someone at a company tells us how they are doing this quarter and how the projects in the coming year will absolutely amazing. We get excited let our emotions take over rational thoughts and we end up investing in something we know nothing about. One company that comes to the top of mind lately is Peloton. This company built an impressive spin bike that is top in class. It also has some of the best trainers in the world leading their classes from an on-demand platform that can be live or conveniently taken any time that fits your schedule through their pre-recorded program. This company has built an amazing product that is helping people reach their physical goals all around the world. But just because they have built an amazing workout platform, are their financials worthy of our hard-earned dollars? Diving into Pelotons Financials In 2019, Peloton decided to go public. This means they had and IPO (Initial Public Offering) that requires them to disclose their financials to potential investors. Although this company had an amazing product their financials were not in such impressive condition. During the first six months of 2019 the company had lost 150 million dollars. The company had also never made a profit in their nine years of existence, in fact they lost money every year. However, when they went public the company was given an 8-billion-dollar evaluation. Hopefully, you are scratching your head right now wondering, “HOW IN THE WORLD CAN THAT BE?” That was exactly what I was thinking. As a personal Peloton purchaser and fan of the company, I was baffled on how they could be given such a huge evaluation when their company was losing money every year. Maybe I am just too simple minded, but I would never pay 8 billion dollars for something that was on track to lose 300 million in a year. Analysts think that they will continue to grow their user base and that research and development will shrink which will lower their expenses and increase their revenue. However, to value something at 8 billion today while it’s losing so much money does not sit right with me. This is why we have to know how to evaluate stocks, ETFs, Mutual Funds, or other investment vehicles we are purchasing. Case In Point – Know Your Investments Several years back, I had a close friend telling me about a stock that was paying 8% dividends at its current market price and he was explaining to me how it owned several large name brand companies under the holding company (think of a holding company as a family of companies). Everything he said sounded great. I was sold and ready to reap the benefits of an increasing stock and also be able to make a solid 8% annual dividend paid quarterly. All I had to do was buy the stock. I purchased the stock at around $40 a share and in two weeks it had gone up to $50 a share. Of course, I felt like a genius – we all do when things go in our favor. I ended up selling the stock at $50 and took a 20% return on my investment in a few weeks. About a month later the stock was back down to $40 a share, so like the genius I thought I was, I doubled my investment in the stock this time and figured it will be back at $50 per share in the next few weeks. Well, you can guess how that turned out. The stock went all the way down to $8 a share over the next year. I held on to it not because I like a roller coaster but because I kept thinking it would come back. The “name brand companies” in this holding company were all struggling. It was pulling the overall share price down and they cut their dividend by over half. However, if I would have looked at some of the basic financials of this company, I would have seen that their net profit continued to drop each year. I would have seen the gross revenue was not on an upward trend. But guess what – I didn’t evaluate the company and I didn’t know what I was investing in. Everything involves risk, even cash. But we greatly reduce our risk when we understand what we are investing in. This is another financial principle for life that will help keep your money out of a lot of pitfalls.