3 Reasons Charlie's Sheen's Engagement to a Married Porn Star Proves the Value of Due Diligence

When investing, whether it is emotionally in a relationship or financially in a publicly traded security, there are always high hopes that all will turn out well. But, as Charlie Sheen's recent engagement to a married porn star proves, it is important to perform thorough research functions, otherwise known as "due diligence." Here are three reasons why it is critical to conduct due diligence operations when investing.

The last thing you want when investing is a surprise.

In the current Fortune magazine, columnist Allan Sloan writes that Fiat FIATY, with its recent acquisition of Chrysler, has "...taken on a huge risk that few people recognize. A risk that Fiat declined to discuss with me. A risk that I didn't hear a single analyst raise during the company's recent two-hour conference call to discuss its fourth-quarter earnings and its plans for the future." Fiat, according to Sloan, is now encumbered with Chrysler's $5.5 billion pension shortfall and that is not good for the shareholders.

Sometimes the "surprise" is intentional.

Billionaire hedge fund manager John Paulson lost $468 million investing in Sino Forest. It turned out that the Chinese forestry company overstated its timber holdings. Paulson was sued for "gross negligence" by an investor for not performing adequate due diligence for "the substantial risks of holding a near-billion-dollar investment in a forestry company based in China." The lawsuit was dismissed, but the point was certainly made about the need for thorough due diligence.

Due diligence does not have to be difficult, just deliberate.

If someone wants to commit fraud, more than likely it is going to happen. But there are some measures of due diligence that can be very effective that are not difficult to execute. As an example, many publicly traded companies based in China have been proven to be bogus entities. This has created a cottage industry as there are companies such as Muddy Waters and Glaucus Research that focus on exposing fraudulent firms in China. For the due diligence needed, Jesper Madigan, a fund manager, in an interview with the American Association of Individual Investors, "Investing in Asia for Dividend Income," noted that of the more than twenty publicly traded Chinese companies revealed to be fraudulent, not a single one paid a dividend.

Due diligence there is very easy to perform, and very effective based on Madigan's remarks.

There should be nothing but sincere wishes and the best of hopes for Charlie Sheen in his fourth marriage. Like the disclosures for mutual funds state, past performance is not predictor of future outcomes. But investing in publicly traded securities requires more than just good intentions and wishing for the best outcome. Due diligence is needed so that a rewarding outcome is the result!