The first thing you must check before buying a share in a company is to determine if it is any good and ask yourself if it has a quality franchise or not. How well is it doing compared to the competition and how easy is it for another competitor to get in to the market. Does it have pricing power? A small company with one supplier is totally dependent on that supplier so you are looking at a high risk strategy if you invest in this company, look instead for companies with a diverse array of suppliers and customers. If you are investing for the long term then will the company you want to invest in survive and be more valuable in the future. It needs to sustain the business over the years and continue to grow and show that it has the ability to become more valuable in ten years time. Beware of small companies that are dependent on one product because if a superior product comes in to the market then there goes the market it operates in. Watch those companies that do their dealings abroad as exchange rates can affect profits and hence the overall business.

How does any change in legislation change the business model, will it be affected by interest rate fluctuations or differing economic cycles, can it survive such changes, is the company prepared for any changes. Does it have strong trademarks and products. Is the company Cash generative, can it grow organically or does it require more injection of cash from its shareholders. Businesses that can grow with little capital and offer a strong franchise are good bets, look for the cash, cash, cash.

If a business model is too complex and you do not understand it, then leave it alone as it could require an expert to spot the flaw in the business. The biggest returns come from companies that have a recovery bias and especially in areas of the market that are very much under researched. The idea is that you need to get in before someone else notices the recovery potential. Ask yourself if the company has any hidden assets that have not been taken account by investors, does it have strong potential for growth that others have not factored in to the share price, has it got a special product that will be hard to duplicate or has control in a niche market that may become attractive as a target to bigger companies, is there going to be a change in management who you feel will turn the company around.

Buffet says go for great businesses run by average management rather than poor business run by great managers. You can not really argue with that. Great managers have the ability to pull wool over your eyes with their charisma, do not let that happen, always look at the cash the business is generating and the growth potential.

Think laterally, what is the future, how will all these companies be affected in the changing world, be a contrarian as this is where the money is made before the rest of the herd enters the investment. Always re-examine your convictions over time as there is always room for a rethink, do not get pig-headed with your ideas and convictions. Life is all about making mistakes, learn from them.

Look at valuations, market capitilisation and the cash flow yield of the share price. If you find this confusing then you really need to go away and learn how to read company balance sheets and how to value companies, only then should you choose shares to invest in (take a look at my blog to understand valuations). Learn finance so no one can take you for a ride with your finances. If you have made a mistake in investment, why bother, learn from it and move on. Remember not to invest all your money in one investment as if it does not work out you need the money to make back the losses.

If you are oversensitive with your failures and you get really emotional and can not sleep at night worrying about share price falls, then please, please,....do not even think about investing in shares unless you can change your temperament and psychology, stick your money in cash at a bank....sorry, do not do that either, stick it under your mattress instead.