How to value investment opportunities

Almost everything that you pay for is an investment opportunity. Buying stocks and investing in mutual funds always comes to mind first, but even buying assets such as a house or a car can be an investment - or a liability if you're not careful. Buying lottery tickets is also an investment, albeit with a low chance of getting a return - investment nonetheless. The same principle applies to any situation where you put some money in and expect to get money out.

How to value investment opportunities

Almost everything that you pay for is an investment opportunity. Buying stocks and investing in mutual funds always comes to mind first, but even buying assets such as a house or a car can be an investment - or a liability if you're not careful. Buying lottery tickets is also an investment, albeit with a low chance of getting a return - investment nonetheless. The same principle applies to any situation where you put some money in and expect to get money out.

This is why we're bringing you this basic guide for valuing investment opportunities that will certainly come in handy in all walks of life. The leading New Zealand magazine, DashTickets.nz, that happens to know a thing or two about risk-taking and return on investment, was kind enough to bring us this valuable set of simple questions to ask yourself.

Will the investment make you money?

By asking yourself this question, you can quickly eliminate purchases that aren't investments. If your purchase won't ever make you money then it's not an investment at all. It's something you pay for because of its immediate value to you, and you don't expect to generate cash with it later on. If you later sell the asset for less than its initial purchase price, that's a good thing because it reduces the money you paid for the ownership, but it's still just something you pay for.

Is the investment certain to make you money?

This is probably the key aspect of investments that so many investors ignore. Investments are never certain to make you money, not even with the most certain types of investments such as real estate or physical gold. There can always be a black swan event that ruins even those. On the other end of the spectrum are the aforementioned lottery tickets, where the chance is very slim.

Reaching the ballpark probability percentage of some investment making you money is difficult enough, but coming up with different levels of probability for different sums of money that the investment might generate is an art. It takes a lifetime of experience, not only in finance but overall, if you want to become a master of judging the probability of a positive outcome of your investment.

When will the investment make you money? How many times?

Another often overlooked aspect of investments is how much time will the whole thing take. Is it something you invest in now and then reap benefits until the end of your life? Will it span another generation so your children can benefit as well, or will they have a liability instead as the roof starts leaking?

Is it an investment that pays once and you exit quickly, or a gift that keeps on giving? Is the return slow and steady at all times, does it increase over time, does it reduce over time? Do you only get a payout when you exit, or are you paid all the time?

How much money can you make?

The aspect that most investors, especially the less experienced ones, put on the first place is the amount of money that an investment will potentially take. And people usually look at the largest number, therefore overestimating the investment opportunity.

With every investment there are varying levels of money that can and will be made, depending on the circumstances that you control and those that you can not. So it's not just the best-case scenario. A much better rule of thumb is to look at the worst-case scenario and then value your investment opportunity on that. If that's a number you're okay with, then the best-case will surely satisfy you as well.

How much work will it take?

There's always some work involved with investments, even if it means calling the broker to ask about your stocks or reading the news. Inevitably, you will live and breathe with your investment, even if there's no physical work involved.

With other investments, such as real estate renovation, the workload is immense. Time is also an important factor to consider, not only in terms of you spending your own time, but the time it takes before the investment is ready to start paying dividends.

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