Analysis

Analysis

The second stage in the investment process is the analysis stage. The analysis stage is so crucial to investors because it r some very important questions.

Questions like, are the returns from this investment sufficient to compensate for the risk that I’m taking?

So being able to calculate what those expected returns are using concepts such as the internal rate of return cash multiples and yields, as well as a few others. 

It also helps you to answer what are the key drivers that impact the performance of this investment and what happens if you are wrong or right or if your lower high about those assumptions.

 

So an example would be if you were doing a rental income property, one of the big drivers of your returns would be what kind of rents you think you’re ultimately going to achieve from that investment?

Well, if you’re wrong about the rents, it’s going to your investment assumptions.

It will help you compare between opportunities as an investor and especially if you want to become a serious investor. You’re not going to be investing in every single opportunity that comes across your desk. You want to pick the one that is a good fit for you and one that you can execute on and one that ultimately will help you make good returns on your investment.

where there are types of analysis that we can run.

 

  • One is called the back of the envelope analysis
    • The back of the envelope is when any investment comes across, you want to do a back of the envelope type of analysis first so that you can reject most of them at this level where at most you’re putting in a few minutes of thoughtful analysis and that’s it.
  • The other one is deeper dive analysis.
    • A deeper r dive analysis essentially allows you to factor in more assumptions, allows you to recall your assumptions to see what your investment would look like, and identify issues with the investment so that you could either address it or basic this investment at this level.

Now, those investments that pass your deep deep-dive analysis, get to a stage called the due diligence.