Strengths, Weaknesses, Opportunities, Threats: The SWOT Analysis March 20, 2012
When you are making an equity investment decision, the first place you often turn to is the numbers: how successful has this company been financially? How many shares of stock does it have outstanding? What is the company spending its money on and how much cash does it have on hand? “Having that SWOT analysis is pretty essential in some cases to make sure you don’t miss something about a company.” Sometimes that data doesn’t exist, especially if you want to invest in a private company or astartup. In those cases, you can complete a SWOT analysis to examine the opportunities and challenges that a company faces. A SWOT analysis can also supplement what you learn from the numbers. ‘Numbers Give the Illusion of Security’
SWOT stands for strengths, weaknesses, opportunities and threats, says Ray Baker, a professor of economics, business and accounting at Rockford College in Rockford, Ill. By identifying factors under each of those four groupings, a person can more clearly analyze virtually any business problem. “There is lots of data around, but how do you combine these pieces of information in such a way that you can use it to get a group of people thinking together?” notes Baker. “It’s a way of setting up thinking about internal and external forces so you can formulate a clearer path to an outcome, whether it’s the right one or not.” For investors, using a SWOT analysis can give insight into a company’s worth beyond what the data shows, says James Early, a former hedge fund manager who is now an advisor to the investor newsletter service run by the Motley Fool, a financial services company. “The great lie of investing is that models are precise. Numbers give the illusion of security,” Early notes. “Having that SWOT analysis is pretty essential in some cases to make sure you don’t miss something about a company. Having some system you go through, having a process you can standardize...
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