10 Questions to Consider When Evaluating Any Investment Opportunity

January 3, 2022

When evaluating a potential investment, investors must analyze different attributes pertaining to the company or asset without forgetting some essential questions related to their overall investment goals. Here are 10 questions to always take into account when considering a new investment.

1- What kind of return can you expect?

This is the first question investors should ask themselves when evaluating an investment. One way to figure this out is to analyze past returns, while keeping in mind that past returns don’t always guarantee future returns. Still, they can give a good indication of the quality of the company or asset. For a publicly-traded company, it’s important to keep in mind that a return isn’t limited to the appreciation of its stock; it also includes the dividend yield that a stock offers.

2- How does the investment fit into your overall portfolio?

Does an existing portfolio need more or less risk? Is this new investment going to increase the percent that your assets are concentrated in a single asset class to unacceptable levels? These are the types of questions it may be useful to ponder. It’s essential to understand the existing level of risk and the overall exposure of an existing portfolio before adding new investments. You’ll also need to review how concentrated a portfolio is and whether it would be useful to add some diversification. Diversification and concentration aren’t only focused on companies or assets, but can also refer to a specific sector or geographic location.

3- How risky is the investment?

The riskier the investment, the higher the return an investor can get, so the challenge for investors is to be able to lower risk and maximize returns. Managing risk implies first understanding the different risks that are part of an investment and then focusing on using different risk mitigating strategies.

4- How liquid is the investment?

Do you want to invest your money for the short or the long term? If the cash used to invest will be needed soon, it’s better to pick an asset that can easily be sold like a stock or a money market fund. If the investor can afford to have the cash locked for the long term, usually years, flexibility is less important and the investment can be less liquid. In that case, private equity or venture capital is more attractive because these asset classes can typically provide higher returns.

5- Who runs the company/manages the asset?

It’s worth taking the time to do background checks on the team running a company or a fund and understand their past successes and failures, their reputation, whether it is the first time these people are working together, and what their vision is. Some investors also want to make sure their values align with those of the management team, especially when making an investment with Environmental, Social, and Corporate Governance (ESG) in mind.

6- What are the fees associated with making the investment?

Is there a minimum investment sum, a minimum cash balance required for potential expenses linked to the investment, any broker fees or management fees? In the case of private markets, how high is the carried interest

7- What are some of the tax implications of the investment?

Basic questions revolve around whether an investment can be made using pre-tax dollars or can be deducted from taxes. You should also know whether profits are taxed and at what level. Anticipating the tax burden or advantage of an investment ahead of making the investment can help better forecast a possible future return.

8- How is the growth of the company?

Before making an investment, investors should check the financial health of the company or the asset. One way to do that is by studying the company’s balance sheet, looking at revenue and expenses and checking the past growth trajectory of earnings. Is the company working on new products or services? Does it plan on hiring more people, and in which part of the business? Does it plan on making acquisitions? Reading press releases and news articles about the company or the asset can be helpful too.

9- How’s the cash situation of the company/asset?

Another way to evaluate an investment is by looking at a company’s current liquidity and cash flow projections. Does the company have enough money to cover expenses? This is especially important if the company has debt and needs to make periodic payments which may exhaust its cash reserves. How cash is generated at the company can help get a grasp on the financial state of the potential investment. If cash mainly comes from operations, it’s more attractive than if the company generates cash through borrowing money or through selling stocks.

10- What is the competitive landscape?

Understanding how a company fits in a sector and sizing it up against its competition is also important to estimate its probability of success and growth within its market. It can be useful to take a look at other companies that fill a similar market niche and compare the two organizations based on the factors mentioned above. This can give you perspective about the relative success of the company.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.