Investment analysis

Lecture 2
 investments can be classified:

by investment object: real investment + financial investment

for participation in the investment process: direct and indirect

investments

by investment time: short-term + medium-term + long-term

investments
 Real and financial investments

Real investments generally involve some kind of tangible asset, such as land,
machinery, factories, etc.

Financial investments involve contracts in paper or electronic form such

as stocks, bonds, etc. The key theoretical investment concepts and
portfolio theory are based on these investments and allow to analyze
investment process and investment management decision making in the
substantially broader context

Together with the investment the term speculation is frequently used.

Speculation can be described as investment too, but it is related with the
short-term investment horizons and usually involves purchasing the salable
securities with the hope that its price will increase rapidly, providing a quick
profit.
• Financial assets are divisible, whereas most physical assets are not. An asset is
divisible if investor can buy or sell small portion of it.

• Marketability (or Liquidity) is a characteristic of financial assets that is

not shared by physical assets. Marketability (or liquidity) reflects the
feasibility of converting of the asset into cash quickly and without affecting
its price significantly.

• The planned holding period of financial assets can be much shorter than
the holding period of most physical assets. The holding period for
investments is defined as the time between signing a purchasing order for
asset and selling the asset. Holding period for investing in financial assets
vary in very wide interval and depends on the investor’s goals and
investment strategy.

Information about financial assets is often more abundant and less costly to
obtain, than information about physical assets. Information availability shows the
real possibility of the investors to receive the necessary information which could
influence their investment decisions and investment results.
 Direct versus indirect investing

Direct investing is realized using financial markets and indirect investing involves financial
intermediaries.

applying direct investing investors buy and sell financial assets and manage
individual investment portfolio themselves. Consequently, investing directly through
financial markets investors take all the risk and their successful investing depends on
their understanding of financial markets, its fluctuations and on their abilities to
analyze and to evaluate the investments and to manage their investment portfolio.

using indirect type of investing investors are buying or selling financial instruments of
financial intermediaries (financial institutions) which invest large pools of funds in the
financial markets and hold portfolios. Indirect investing relieves investors from making
decisions about their portfolio.
Classification of financial intermediaries

Contract and savings intermediaries (insurance companies,

pension funds, life insurance companies)

Deposit intermediaries (banks, mutual lending companies)

Investment financial intermediaries (mutual funds, investment

funds)
 Additional classification
• on the use of limited resources in the investment process - land, capital
resources and personnel;
• by the scale of investment - investments in small, medium and large projects;
• according to the degree of exposure to the influence of other investments -
independent investments; requiring accompanying investments; investments
that are sensitive to making competing investment decisions;
• by the form of obtaining the effect, which depends on the investment
objectives;
 Who makes investment decisions

non-financial companies: professional stock market

diversified companies, players: private equity funds,
specialized companies hedge funds, mutual funds

private investors:
entrepreneurs implementing
state funds, partnerships
their businesses, business
angels
 Investment management stages
1. analysis of the country's investment climate. It includes the study of the
following forecasts: dynamics of gross domestic product, national income
and industrial production; the dynamics of the distribution of national
income (accumulation and consumption); development of privatization
processes.
2. the choice of specific areas of investment activities of the firm, taking into
account the strategy of its economic and financial development. At this
stage, the firm determines the sectoral focus of its investment activities, as
well as the main forms of investment at certain stages of activity.
3. selection of specific investment objects, which begins with an analysis of
proposals on the investment market.
4. determination of the required volume of investment resources and the
search for sources of their formation. At this stage, the total need for
investment resources is predicted to carry out investment activities of an
entrepreneurial firm in the planned directions.
5. investment risk management.
 Investment management process

Setting of investment policy.

Analysis and evaluation of investment vehicles.

Formation of diversified investment portfolio.

Portfolio revision

Measurement and evaluation of portfolio performance.

Setting of investment policy is the first and very important step in investment
management process. Investment policy includes setting of investment objectives. For
example, the investment policy may define that the target of the investment average
return should be 15 % and should avoid more than 10 % losses. Identifying investor’s
tolerance for risk is the most important objective, because it is obvious that every
investor would like to earn the highest return possible.

Analysis and evaluation of investment vehicles. When the investment policy is set
up, investor’s objectives defined and the potential categories of financial assets for
inclusion in the investment portfolio identified, the available investment types can
be analyzed. Technical analysis + Fundamental analysis

Formation of diversified investment portfolio. Investment portfolio is the set of

investment vehicles, formed by the investor seeking to realize its’ defined investment
objectives.
random diversification, when several available financial assets are put to the portfolio at
random;
+ objective diversification when financial assets are selected to the portfolio following
investment objectives and using appropriate techniques for analysis and evaluation of
each financial asset.
Portfolio revision. This step of the investment management process
concerns the periodic revision of the three previous stages. This is
necessary, because over time investor with long-term investment
horizon may change his / her investment objectives and this, in turn
means that currently held investor’s portfolio may no longer be
optimal and even contradict with the new settled investment
objectives

Measurement and evaluation of portfolio performance. This the last

step in investment management process involves determining
periodically how the portfolio performed, in terms of not only the
return earned, but also the risk of the portfolio. For evaluation of
portfolio performance appropriate measures of return and risk and
benchmarks are needed.
Models for choosing an investment object SMART-MODEL

Specific

Measurable

Achievable

Relevant

Timed- bound
• Your goal should be clear and specific, otherwise you won't be able
to focus your efforts or feel truly motivated to achieve it.
• Your goal also needs to be realistic and attainable to be successful.
In other words, it should stretch your abilities but still remain
possible. When you set an achievable goal, you may be able to
identify previously overlooked opportunities or resources that can
bring you closer to it.
• This step is about ensuring that your goal matters to you, and that it
also aligns with other relevant goals. We all need support and
assistance in achieving our goals, but it's important to retain control
over them. So, make sure that your plans drive everyone forward,
but that you're still responsible for achieving your own goal.
• Every goal needs a target date, so that you have a deadline to focus
on and something to work toward. This part of the SMART goal
criteria helps to prevent everyday tasks from taking priority over
your longer-term goals.
 17

SWOT analysis PROCTER & GAMBLE

Strengths Weaknesses
• Higher dependence upon US and
• Strong consumer goods brands • Walmart
• Product portfolio • Stagnant Growth
• Global operations • Years of Management related problems
• Economies of scale • Imitable products
• Efficient product distribution network • Limited degree of business
• Marketing • diversification
• Innovation
• Growing online presence

Opportunities
▫ Marketing innovation
▫ Product innovation
▫ Mergers and acquisitions
▫ Rural & emerging markets
Threats
• Competitive pressures
• Regulatory pressures
• Growing costs of raw materials and
labor
 ü BRAND IMAGE

STRENGTH
ü Heavy competition in ü GLOBAL PRESENCE
the soda industry ü MARKETING CAPABILITIES
ü Increased costs of
raw material and ü LARGE PRODUCT PORTFOLIO
labor
ü legal and regulatory
threats ü
THREAT SWOT WEAKNESS

ü LOW PRODUCT

OPPORTUNITY
ü DIVERSIFICATION
ü MARKETING
ü ABSENCE OF HEALTHY
OPPORTUNITIES BEVARAGES
ü DIGITISATION OF SUPPLY ü WATER MANAGEMENT
CHAIN
ü MARKET EXPANSION
ü HEALTHY PRODUCTS
 Investment project
The Code of Knowledge on Project Management, developed in 1987 by the
Project Management Institute (USA), contains the following definition: a project
is a certain task with certain initial data and required results (goals) that
determine the way to solve it

goals of
concept of the means of achieving implementation:
project the goal results of solving
the problem

Definition and scope of ‘Major projects’

According to Article 100 (Major projects) of Regulation (EU) No 1303/2013, a major
project is an investment operation comprising ‘a series of works, activities or services
intended to accomplish an indivisible task of a precise economic and technical nature
which has clearly identified goals
 WHAT IS A PROJECT?
The conventional project analyzed in capital budgeting has three criteria:
(1) a large upfront cost,
(2) cash flows for a specific time period, and
(3) a salvage value at the end, which captures the value of the assets of the project when the
project ends.

Major strategic decisions to enter new areas of business

Acquisitions of other firms are projects as well, notwithstanding attempts to create

separate sets of rules for them.

Decisions on new ventures within existing businesses or markets

Decisions that may change the way existing ventures and projects are run, such as
programming schedules

Decisions on how best to deliver a service that is necessary for the business to run smoothly.