What Is Kicking the Tires?
Kicking the tires is a colloquial expression referring to 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 earnings and revenue performance, considering the company’s competitive strengths and weaknesses, and reading news articles or headlines about the company.
Key Takeaways
- Kicking the tires involves conducting a minimal amount of research before making an investment decision.
- In the context of car shopping, it is the opposite of conducting serious, in-depth research or due diligence.
- While it can be a valid strategy to save time and effort, it may lead investors astray with incomplete or wrong conclusions.
Take a Glance at Investments: Kicking the Tires Explained
Kicking the tires gets its name from shopping for an automobile. A car shopper who shows some interest in a car probably will not look under 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.
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, aiming to read several research reports, but is not yet ready to invest. An investor who is kicking the tires may simply take a look at a stock’s price-earnings ratio and other simple valuation metrics versus those of its peers.
Kicking the tires typically includes a cursory look at a company’s price chart to get a sense of past performance. Those who employ technical analysis also scan for patterns and potential entry and exit points based on the study of both price and volume. Kicking the tires also applies to a wide 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.
Examples of Kicking the Tires
Let’s consider some examples:
- Hedge Fund Investment: Someone thinking about putting money in a hedge fund starts by reading advertising material provided by the investment management company but does not yet look up the investment manager’s disciplinary history.
- 12-Month CD: Similarly, someone kicking the tires on a 12-month CD looks up interest rates online but does not 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. Sometimes, investors who start by kicking the tires continue on to more rigorous analysis that leads to interesting finds, within their normal investment universe, or even outside their usual parameters.
Depending on an investor’s strategy, however, kicking the tires too often may lead to diversions and poor investments. Constantly kicking the tires on new ideas can also waste 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.
Related Terms: due diligence, investment research, technical analysis, investment strategy.
