What is Due Diligence and Why Does It Matter in Investing?
The first time I heard the term due diligence, I thought it was just another way of saying “be diligent” or “work hard.” In Filipino, I even equated it with being masipag. But as I gained more experience in business and investing, I realized that due diligence means something far more specific—something every smart investor must take seriously.
Simply put, due diligence is the process of thoroughly investigating and verifying information before making a financial decision. It’s about making sure your money, time, and energy are not wasted on risky, shady, or poorly thought-out opportunities.
In short, due diligence protects you from making expensive mistakes.
Why is Due Diligence Important?
On the surface, it might seem like common sense to double-check an investment before committing. But in reality, many people—both beginners and experienced investors—still fall victim to scams or lose money because they skipped the details.
The truth is, due diligence goes beyond just checking legality or profitability. It’s about digging deep, validating facts, and eliminating assumptions.
- Without it, you rely on trust and gut feel, which are not enough in the world of money.
- With it, you can confidently say you’ve considered the risks, weighed the evidence, and made an informed decision.
It’s the step that separates a reckless decision from a calculated move.
A Story of Skipping Due Diligence
Let’s say a friend excitedly tells you about a “can’t-miss” business opportunity. He says the returns are 20% per month, guaranteed. Sounds tempting, right?
Some people jump in immediately, especially if the offer comes from someone they know and trust. Months later, they realize it was a scam—no business license, no actual product, just a clever Ponzi scheme.
If they had practiced due diligence—checking the company’s registration with the SEC, verifying how profits are really generated, and questioning the unrealistic returns—they could have saved themselves a painful loss.
Applying Due Diligence to Online Opportunities
Today, more people are exploring online income streams. You’ll find countless offers: surveys, freelancing, blogging, e-commerce, and more. Some are legitimate, others are traps.
Imagine you come across a website claiming you can earn thousands of pesos weekly by simply uploading photos or filling out forms. Before you jump in, here’s how due diligence works in practice:
- Who’s behind it?
- What company or individual is offering the opportunity?
- Are they a registered, reputable entity—or just an anonymous website with no physical address?
- What company or individual is offering the opportunity?
- Is it legitimate?
- Are there credible testimonials or reviews from real people?
- Do they show actual proof of payment, or just vague promises?
- Are there credible testimonials or reviews from real people?
- What’s required from me?
- Do you have the necessary skills, time, or resources to realistically succeed?
- Is there hidden fine print that makes it harder than it looks?
- Do you have the necessary skills, time, or resources to realistically succeed?
- What are the risks?
- Could you lose money, waste time, or compromise personal information?
- What happens if the platform suddenly shuts down?
- Could you lose money, waste time, or compromise personal information?
- Worst-case scenario:
- If it fails, how badly will it affect you?
- Will you be financially crippled or just slightly inconvenienced?
- If it fails, how badly will it affect you?
By asking these questions, you can separate genuine opportunities from scams.
Due Diligence Beyond Online Work
While the example above applies to internet-based opportunities, the same principle holds true for almost every type of financial decision—stocks, real estate, partnerships, or even franchising.
Here’s how you can apply due diligence in different areas:
1. Stock Market Investments
- Research the company’s financial statements, earnings, and business model.
- Don’t just follow hype from social media groups. Check if the company has long-term potential or is just a “pump and dump” stock.
2. Real Estate
- Verify property titles with the Registry of Deeds.
- Check for liens, encumbrances, or unpaid taxes.
- Inspect the property physically—don’t just rely on pictures.
3. Franchising
- Study the franchisor’s track record.
- Talk to existing franchisees about their experience.
- Compare the franchise fee and ongoing royalties to the expected earnings.
4. Partnerships and Joint Ventures
- Research your potential partner’s reputation.
- Ask for financial transparency.
- Put agreements in writing, not just verbal promises.
How to Practice Due Diligence Effectively
Here’s a framework you can apply to almost any financial decision:
- Research the Company or Person Involved
- Look up their track record, registration, and reputation.
- Check regulatory bodies like the SEC (Securities and Exchange Commission) or DTI in the Philippines.
- Look up their track record, registration, and reputation.
- Validate the Numbers
- Don’t just rely on promises.
- Look for audited financial statements, earnings reports, or real customer data.
- Don’t just rely on promises.
- Assess the Risks
- Ask yourself: What could go wrong?
- Understand both the potential rewards and the possible downsides.
- Ask yourself: What could go wrong?
- Seek Outside Opinions
- Read credible reviews.
- Consult mentors, financial advisors, or industry experts before committing.
- Read credible reviews.
- Check Your Emotional Biases
- Are you deciding based on fear of missing out (FOMO)?
- Are you being swayed by trust in a friend instead of hard evidence?
- Are you deciding based on fear of missing out (FOMO)?
Red Flags to Watch Out For
When practicing due diligence, here are some signs that should immediately make you cautious:
- Guaranteed high returns with little to no risk.
- Pressure to “act now” or “invest before the deadline.”
- Lack of transparency in financials or operations.
- Vague answers to specific questions.
- No verifiable track record or registration.
Remember: if it sounds too good to be true, it probably is.
Final Thoughts
Doing due diligence may take time and effort, but it’s one of the best defenses you have as an investor. Remember, it’s not about being paranoid—it’s about being prepared.
Before you put your hard-earned money into any venture, make sure you’ve done the work to confirm it’s worth the risk.
As the saying goes: “Measure twice, cut once.”
Your financial future deserves that level of care.
