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Thursday, September 18, 2008

Investing: Understand The Business. Ask Questions

"Never invest in a business you cannot understand." - Warren Buffett

To be quite honest, to this point? I have only discussed the ways to reap the fruitages of investing. Dividends. DRIP plans. I have, to some degree, discussed what I look for. How long has the company been paying dividends? How often are those dividends paid? Does the company have a DRIP program for their dividends? What time of the year do you plan on investing in the company?

But I haven't dedicated much attention towards the selection process. So let's talk about that now.

First question you need answered; is pretty basic. What is it - that this company produces to make a profit? How do they generate income? This is pretty basic. If you are going to invest your money in a business, you want to know how they are going to make profits so that you can earn a return on your money. Let's take Frontline Ltd (FRO). as an example. Google Finance has this summary, when discussing Frontline Ltd.

"Frontline Ltd. (Frontline) is engaged primarily in the ownership and operation of oil tankers, including oil/bulk/ore (OBO) carriers. The Company operates tankers of two sizes: very large crude carriers (VLCCs), which are between 200,000 and 320,000 deadweight tons (dwt), and Suezmaxes, which are vessels between 120,000 and 170,000 dwt. As of February 29, 2008, the Company operated a tanker fleet consisting of 76 vessels. The fleet consists of 42 VLCCs, which are either owned or chartered in, 20 Suezmax tankers, which are either owned or chartered in, eight Suezmax OBOs, which are chartered in, and five VLCCs, and one Aframax tanker under its commercial management. In January 2008, the Company established Independent Tankers Corporation Limited (ITCL), as a wholly owned subsidiary for the purpose of holding, by way of contribution, its interests in Independent Tankers Corporation (ITC). In March 2008, Frontline spun off 20% of ITCL to its shareholders."

So that tells us a few things about this business.

1) They own and operate tankers for oil, bulk, and ore. They do this by a few

2) Some of these vessels are chartered, or contracted for a specific period of time.

3) It created a subsidiary company to hold it's interests. It shared ownership of this company with shareholders.

This should raise a few questions. We'll talk about those questions in the videos.

Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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