Due diligence

The work of independently verifying the claims made about an investment before committing money to it - the documents, the counterparties, the registrations and the numbers.

Example

Contacting a fund's stated auditor and custodian directly, using contact details you looked up yourself rather than the ones you were given.

Important

Diligence is verification, not impression. Reading material the seller supplied and finding it persuasive is not diligence, however much of it there is.

Related terms

• Ponzi scheme — A fraud in which money from new investors is paid out to earlier ones and presented as investment returns, because the stated investment activity either does not exist or does not produce the reported profits.
• Disconfirming evidence — Information that would make your thesis wrong - facts you would have to explain away rather than cite.
• Investment thesis — A written statement of what you believe about an investment, at what price it is worth owning, and what specific observation would tell you that you were wrong.

Lessons that explain it

• Appraising one item: authenticate before you price, not after — Five checks on one specific opportunity, starting with proof the object is genuinely what it claims to be - because a confident price on a fake or misattributed item is not a discount, it is a total loss waiting for a buyer to notice. (13 min)
• Good co-investors share deals, diligence and the hard conversations — Relationships with other investors - syndicate leads, angels and funds - provide deal access and shared diligence. They are built on reciprocity, reliability and honest views about deals. (10 min)
• Appraising one exposure: the drivers, the carry and what the product holds — Six checks. Two of them - the curve and what the product actually holds - decide more of a five-year outcome than any view about supply and demand, and both have exact published answers. (13 min)
• Seven questions about one specific asset — What it does, who can issue more of it, who already holds it, how deep the book is, whether the rules can be changed, where you would keep it, and what would tell you that you were wrong. (14 min)
• How many do you have to see to make one investment? — Put real numbers on your funnel and two things become obvious: how fast a first look has to be, and how much sourcing you actually need to support the portfolio you are trying to build. (12 min)
• Why what comes to you is a biased sample — The opportunities that push hardest for your attention are drawn from a worse pool than the ones that do not need to push, and urgency is the tell. (9 min)

All 578 terms in the Investing glossary