S.W.O.T. is a decision making technique used in financial and market analysis. Often used internally by companies to evaluate potential products or investments, it is also a simple tool you can use to make sure you do due diligence when making investment decisions in individual companies.
S.W.O.T. is an acronym for:
- Strengths
- Weaknesses
- Opportunities
- Threats
Remembering SWOT when looking at companies you are thinking about investing in will give you a quick reminder to not only look at their internal situation (Strengths and Weaknesses), but also evaluate the external factors that impact their success Opportunities and Threats. I often also think of Strengths and Weaknesses as more of a retrospective look at what they’ve well at in the past or areas where they’ve performed poorly. Opportunities and Threats is more of a future looking assessment. Regarding Opportunities, I ask “What are the opportunities for growth at this company, what new markets could they enter or what new products could they create to boost their revenue and profits?”. Regarding Threats, “What competitors do they have now and what other companies that exist today or may exist in the future could put their success in jeopardy?”. Does the company have a competitive advantage over other companies in their industry? Are there other companies that have a greater competitive advantage that will continue to pressure the company I am considering investing in?
Taking your investment portfolio to the next level by investing in individual companies can bring great reward, but it also presents great risk. Doing your due diligence in financial and market analysis of your potential investments is critical and you should feel empowered to do the research on your own. You can consult market research reports and analyst recommendations about a given company, but doing the analysis yourself will allow you to stomach volatility better and truly understand what the company does that you are investing in.
This Wikipedia article has some more detail on SWOT analysis and offers additional links if you are interested in learning more about the technique.
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