What is Kicking The Tires
Kicking the tires is a slang term for performing minimal research into an investment, as opposed to conducting a thorough and rigorous analysis. The process usually includes a cursory reading of the company's annual report, looking at its historical earning and revenue performance, considering the company's competitive strengths and weaknesses and reading news articles about the company.
An investor who is kicking the tires also takes a look at a stock’s price-earnings ratio and other relative valuation metrics versus those of peers.
Lastly, kicking the tires typically includes taking a look at a company’s price chart to get a sense for past performance. Those who employ technical analysis also scan for patterns and potential entry and exit points based on a study of both price and volume.
BREAKING DOWN Kicking The Tires
Kicking the tires gets its name from shopping for an automobile. A car shopper who shows some interest in a car probably won’t even open the hood or perform a serious comparative analysis versus similar models. However, this shopper usually takes a walk around the car from front to back to get a look and kick the tires. This shopper is not considered a serious buyer or a hot prospect.
Similarly, a tire-kicker in the investment world is not ready to make a decision on an investment. A stock investor often examines the company’s balance sheet, previous cash flow statements, and income statements and also wants to read several research reports, but is not ready to invest.
Kicking the tires applies to a broad range of investments, such as stocks bonds, mutual funds, hedge funds, closed-end funds, money markets, certificates of deposit and even private-equity and real estate investments.
For example, someone thinking about putting money in a hedge fund starts kicking the tires by reading advertising material provided by the investment management company, but doesn’t yet look up the investment manager’s disciplinary history on the FINRA web site. Similarly, someone kicking the tires on a 12-month CD looks up rates online, but doesn’t read the fine print regarding penalties, restrictions and the automatic rollover policy.
Pros and Cons of Kicking the Tires
Kicking the tires is how serious analysis often begins. At times, investors who start by kicking the tires continue on to more rigorous analysis that leads to interesting finds, either within their normal investment universe, or sometimes outside of where they normally look for ideas.
Depending on an investor’s strategy, however, kicking the tires too often sometimes leads to diversions and poor investments. Constantly kicking the tires on new ideas also wastes time. For this reason, it’s sometimes preferable for investors to start with a strict set of criteria to narrow a pool of potential investments, rather than randomly kicking tires.