Identifying The Right Investment
Updated: Sep 8
3 Things To Analyze:
The economic prospects of the business
Who is running the business?
The price we must pay
The economics of the business are by far the most important. The business model must be viable, sustainable, durable, and poised for perpetual profitability. Businesses are innovative by nature, therefore it’s difficult to create a “one size fits all” method to evaluate the economic prospects of a given business. The best ways to perform this analysis are methods that have been developed and perfected over the years. The methods most used by investors are: SWOT analysis, PEST analysis, and Porter’s 5 Forces analysis.
The second most important aspect of the investment decision process is managerial analysis. After all, you’re going to be giving your money to a company for their business, you’d want to ensure they spend your money efficiently. And taking a page out of Warren Buffett’s playbook, finding managers who take ownership of their role within the company without holding majority ownership is crucial. The potential downside to having a manager that does not act in the best interest of the company is far greater than purchasing a slightly overvalued asset with a good manager.
And lastly, when we make an investment, we want to do everything possible to get the best price. There are plenty of types of valuation analysis to perform, many of them vary based on the type of investment. For instance, stocks and bonds are valued differently from each other, and real estate has its own style of analysis.
For those who aren’t great working with numbers, there are an abundance of free services that will provide nearly all kinds of valuation analysis. This is because the process can be automated with ease, and the numbers themselves rarely reflect that actual status of the company. And since the numbers can always be manipulated within the world of finance, it’s what the best investors look at last.