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Demystifying the Investment Research Process

Investment decisions are hard. Without a comprehensive investment research process supporting your financial decisions, even the heftiest investments in top-performing stock, or real estate, markets can result in disappointment. Remember – don't put all your eggs in one basket. However, when it comes to investing, you must be careful when selecting which baskets you divide your eggs between.

Investment research is an extensive and meticulous process where you consider your needs, analyze different prospects from different angles, and make calculated assumptions to finally determine whether investing in a particular option is right for you.

When analyzing a prospect, you don't just look at one aspect. It is impossible, and somewhat foolish, to judge anything at face value, without considering the context and multiple facets that are intrinsic to its nature. For example, in July 2017, Forbes stated that investing in the entertainment-streaming giant Netflix was a great idea. Today, numbers are up, but those who blindly went ahead and invested in those pricey stocks then ended up having a pretty stressful few months, with some even divesting themselves of their stocks at a loss.

Therefore, any investment decision must be determined through a comprehensive and carefully conducted, Investment Research Process.

The Investment Research Process

Investment research is based on three fundamental aspects:

  • Environmental Analysis

    The capital market, politics, the economy, and even the geographical layout of the land are all essential to understanding and targeting your investments. In this step of the investment research process, the current situation and the factors that influence it are identified and analyzed. The political climate, as well as economic trends and developments also play a big role in how markets perform. Through research, analysis, and comprehensive calculations, accurate predictions can be made about the value of your future investments.

    For example, continuing with our Netflix example, had investors conducted an environmental analysis before buying the stocks, they would have realized that despite a positive outlook, there were a few things working against Netflix at that time.

    The company was expanding globally, while also introducing a host of original films and series, all produced in-house. The mounting increase in expenditure left Netflix deep in liabilities, never a good sign within the market. To combat their increasing costs, the company decided to raise membership fees, raising a public outcry.

    Alongside, there was also competition emerging – in mid-2018, Walt Disney had removed all their films from Netflix, after announcing the upcoming launch of their own rival streaming service.

    Furthermore, the merger of AT&T and Warner Media was soon followed with the newly-formed entertainment giant announcing its own streaming network. For Netflix, this meant having to remove all DC and Marvel productions from its servers, content that had proven to be wildly popular among Netflix subscribers. These developments did not stand well with the market, and in late 2018, Netflix stocks fell, performing at least 12% lower than expected.

    An environmental analysis is essential to presenting potential investors with the larger picture. It helps you take steps towards deciding by giving you insight into what lies beyond the face value of a company or its shares.

  • Asset Allocation

    The second part of the process is referred to as Asset Allocation. As the name suggests a series of calculations are used to deliberate where your resources are most likely to perform successfully. The goals and aims out of your investment are considered, and your portfolio is tailored accordingly.

    For example, if your goals are long-term and you aren't worried about the short-term risks involved, alongside exploring a developing economy or real estate, your portfolio manager might also recommend investing in a company whose numbers, combined with other assessments, suggest a bright future. Carefully evaluated investment analysis and portfolio management are key to successful investments.

  • Security Selection

    This is the final step of the process, where specifics come into play. Now that you have decided on the best avenues for your investments, you can begin selecting your specific investment options.

    There are three methods of evaluation that help you determine which securities best suit your specific needs and purposes. This trio of approaches must be used together to help filter out any unsuited investments.

Approaches to Selecting Security

  • Macro Investing

    One approach to investing is to invest in assets that have a bigger scope. Similar to a hedge fund strategy, Macro investing relies on global developments rather than just being industry or market specific.

    Your portfolio manager would primarily look into the global climate and make predictions or assessments such as approaching recessions in a particular country, or promise of growth in a developing economy. Using this context, you would be encouraged to take action accordingly.

  • Technical Analysis

    Here, the eventual investment decision is primarily based on the market action. The classic supply-and-demand rule comes into play here, and the top-performing prospects are shortlisted. It is then determined how these securities will perform in the long run.

    Prices and volume data are analyzed, and trends established. Results identify the securities that promise good returns in the future, allowing for investment decisions to be made.

  • Fundamental Analysis

    A fundamental analysis requires a deep dive into minute details as you research your investment prospect. You investigate the financial stability of the company, its ability to generate income, even bringing the management and operational structures under scrutiny.

    Hypothetically, your strategy may involve targeting a small start-up. At this stage, financial and cash flow statements, as well as balance sheets, past performance, and even public opinion of the company in question, are all studied. This analysis also takes into consideration and makes predictions, based on any strengths and weaknesses within the company, as well as, current and emerging competition.

    When considering stocks, their current prices are analyzed and compared with estimates derived from external research and calculations. These results decide whether a stock is under, or over-valued, allowing you to determine which particular opportunities to invest in. Based on the outcome of this analysis, a stock is bought when its prices are below its potential and sold off the moment it meets its true value.

    Therefore, a fundamental analysis of Netflix stocks around mid, to late 2018, would have shown that despite the increasing competition and plummeting stock prices, the company's earning potential, is immense and will only grow in future, as evident by its ever-increasing subscribers and wildly popular, region-tailored original content.

Investing in the Investment Research Process – Why?

Having covered the basics of the investment research process and its purpose, it must be stated that as is the nature of investing in the market, there is always some degree of risk involved. You might question then what is investment research there for?

Well, the investment research process uses in-depth data and research to filter out all those investment prospects where there are volatile or unpredictable factors involved.

It helps narrow down the options that suggest growth in the future, can support their promises of returns with figures and reports. Most importantly, an effective investment research analysis would match you up with securities that align perfectly with your goals and specific portfolio needs.

Investment Research Defining the Decision Making

Investment decisions can be difficult, and loaded with risk but effective, and expert, investment research and analysis can help give you insight into what to expect from your investments. Were you to wake up tomorrow and decide to invest in Apple, in-depth investment analysis and portfolio management report might actually tell you that while it dominates the market as the world's top ranking company, right now may not the best time to invest in the tech giant. The results would also highlight better options that are available in the market.

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