1. How does this investment fit into my overall financial plan? First things first: when you come across any investment opportunity, you need to determine a reason for including the investment in your portfolio. What purpose does this investment serve? What need does it serve? What will it allow you to do or accomplish, either now or in the future? How does it fit with your overall investment strategy, or your larger financial plan? There are, of course, many possible answers to these questions. Perhaps the opportunity exposes you to an asset or industry that’s growing strongly with a bright future ahead. Or perhaps it offers you some much-needed diversification into a different investment geography, or economic industry, or asset class which you didn’t previously have in your portfolio. Maybe the investment fulfills your need for additional income from your portfolio. Or perhaps it’s a way of swapping a somewhat volatile asset out of your portfolio and replacing it with something that’s more of a ‘steady as she goes’ type of investment. Or perhaps this investment is simply a vehicle to make money; you see an opportunity to buy an asset at a low price today, and sell it for a higher price in the future. Any or all of these can be valid reasons for investing – it really depends on your financial objectives, as well as your overall tolerance for volatility. But keep in mind that, as your life changes, your definition of “fit” will change with it. Sometimes that means taking another look at an opportunity that no longer aligns with your life goals, or with the way you feel about risk and reward. 2. What’s the financial overview? Next, you’ll need to take a look at the financial case for (or against) the investment, and get a broad understanding of how good the opportunity really is. Don’t have a PhD in finance? Not to worry: the following questions can function as a “litmus test” to help determine whether the opportunity you’re looking at is worth digging into deeper. ▶ How does the company or asset make money for its investors? ▶ Is the product, service or asset in demand? Why? ▶ How has the company or asset performed in the past? ▶ What does the future look like? Is the company or asset positioned for growth and/or increased profitability? ▶ How does this company fit within its industry? What’s the competitive position? ▶ How is the industry or asset class doing as a whole? ▶ What are some of the obstacles and challenges that the company or asset faces? Are these surmountable? ▶ What’s the “best possible” result, if nearly everything goes right? ▶ What’s the “worst possible” result, if nearly everything goes wrong? ▶ Am I being fairly compensated for the risk I’m taking on? Does the potential upside outweigh the potential downside? Some answers will require you to make some assumptions about the company’s future. Others can be found in annual reports, investment analysis and other commentary. Finance 3. What exactly makes this an “opportunity”? There’s a big difference between investment ideas (which are fairly common) and investment opportunities (which are more rare). The difference comes down to a “catalyst”: an event or situation or change that will cause a company or asset to be re-priced. The difference between the price of the asset now (pre-catalyst) and after (post-catalyst) is where investors make their profits. Determining what exactly that catalyst is, how likely it is to happen, and when it will happen is a critical part of evaluating any investment opportunity. There are many catalysts that can drive a re-pricing of a given company or asset: ▶ market conditions have shifted in the company’s (or asset’s) favour; ▶ a broad downturn in the overall market is punishing an otherwise excellent company (or a particular asset) unfairly; ▶ economic, regulatory or political events have turned in favour of this company or asset; ▶ the company/business model/asset/geography is understudied, overlooked or poorly understood; ▶ the growth prospects or future outlook for this business (or the country in which it operates, or the entire industry or asset class you’re looking at) has changed, or is somehow underappreciated/ miscalculated; ▶ the management team has a new strategy to which the market isn’t paying attention just yet; ▶ the company has expanded recently into new markets, or an asset is now attractive to more people than before; and/or, ▶ the company has built a sustainable competitive advantage that should help it earn operating profits far into the future. Again, this list is just a starting point – you may be able to identify several other potential catalysts, and it’s entirely possible that the opportunity which you’re looking at has more than one catalyst. But if you’re having trouble identifying any catalyst at all, or if the one that you do identify is overly complex or difficult to understand, or doesn’t seem all that realistic, it could be a sign that the opportunity isn’t all that it’s cracked up to be. CSANews | SUMMER 2023 | 27
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