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  • Glenn D. Surowiec

Ongoing Due Diligence: How do you evaluate investments after you've made them?

Another due diligence question: how do you evaluate investments after you’ve made them to make sure they remain smart investments and shouldn’t be changed?

Procedurally, I follow a lot of the same tactics for ongoing due diligence as I did for evaluating a business upfront: I talk to management, process relevant SEC filings, review earnings reports, talk to other investors, listen to what the company is saying and to what competitors are saying as well, and so on.

The real question here is what to do when a company underperforms relative to expectations or hopes after they’ve been purchased. The first and most fundamental thing: don’t panic. You don’t want to get caught-up in short-term concerns. As long as the original value proposition is still there, dips are to be expected, and 99% of the time won’t amount to anything in the long run.

There’s a balance, though. You don’t want to give in to short-term thinking, but you have to keep the realities of the market in mind. I’m reminded of the concept of “creative destruction,” coined by Austrian-born economist Joseph Schumpeter in the 1950s. He referred to it as the "process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

In other words, in a healthy capitalist society you will have a constant flow of money moving to better, more innovative ways to build and to deliver products and services that can displace old ways. We also call this “disruption.”

Remember Blockbuster (pre-Netflix)? Alta Vista (pre-Google)? Blackberry (pre-iPhone and Android)? Sears (pre-Walmart and Amazon)?

Investors have to really just be on alert for that. Every industry vertical that we live in has gone through some level of upheaval over their existence. Investors do need a healthy level of not resting on past success as a means to guide them into the future. As investors, we always have to operate with that kind of mindset. We have to realize it’s not the existing competitors that are going to hurt you. It's the ones we’re not really thinking about but who have thought about things differently enough to disrupt the market.

So, in continuing to monitor investments over time, we have to ensure the same advantages that make it difficult for competitors to compete are still in play. If and when there’s something new happening in the space, then we have to size the situation up again.



Glenn D. Surowiec
Registered Investment Advisor
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