Good Day Everyone,
Today I want to talk about a back and forth email conversation I had with a reader recently regarding an investment opportunity he had. He wasn’t entirely sure if this investment was suitable for me so he asked me for some advice. I won’t mention his name or the specific investment, but I will say it was not a private placement, and not a publicly traded investment vehicle. I think there were lots of things said in that conversation that are learning points for anyone considering any type of investment option. So I’ll start by saying the quote, and I’ll discuss what we can all learn from what was said. I hope this helps you guys.
“Some of my friends are saying this is a great opportunity but I don’t know much about this industry”
At this point, I haven’t even opened the company’s website, but when I read this comment from him, I was immediately skeptical. I’m really happy he sought unbiased advice on this (didn’t have to be me) because any time a person claims something is a “great opportunity” is a huge red flag for me, especially if you aren’t familiar with the investment. So the lesson from this quote is don’t just take people’s face value about investment opportunities whether it’s a stock, bond, or otherwise. ALWAYS do your homework!
“They are saying a 10% internal rate of return, 18% with tax credit.”
The stock market returns an average 7-9% annually over time depending on which index you track. When someone tells you an investment is expected to yield 10% (18 with a tax credit) that should be a red flag. The higher the risk, the higher the returns. It is entirely possible for a company to generate those kinds of returns, but it is your responsibility to understand the risks involved with achieving those returns and whether you are able to tolerate those risks.
“I did notice they got really defensive when I questioned the 10% return rate. They told me it was justified since all the construction is already complete but they seemed to be upset that I mentioned it seem higher than most investments.”
The reader actually had an opportunity to attend an investment session held by the company for potential investors. He questioned their expectation of 10% returns, and didn’t get a satisfactory answer. Whenever I do a Stock of the Month, I never tell you how much returns you can expect because it’s next to impossible to know for sure. When someone is proposing an investment with a specific expectation of return and they can’t clearly state how those returns will be generated, be very skeptical, especially when the returns are above market averages.
“When I questioned them on the liquidity of my investment they told me I can only sell my shares to other shareholders.”
I will reserve my opinion of how I feel about this because the investment opportunity was a private placement to investors in a particular geography, it does make some sense. The point I want to make here is that when you hear people talk about investments, generally (and rightfully so) the two main topics of conversation are 1) returns and 2) risk (not enough talk about risk). However, I feel there isn’t enough (or in some cases none at all) conversation about liquidity (how quickly and easily your investment can be turned back to cash). Depending on what your personal situation is, and what the purpose for that money is, liquidity is arguably as important as returns and risk.
Ultimately for this reader, he opted against this opportunity with liquidity being a key reason. He was approaching retirement age, and being able to easily access his money when the time came was a big issue for him. Before you consider any bond, real estate, GIC, mutual fund, (and even some thinly traded stocks), be sure to consider if the investment is liquid enough for your life needs in addition to it’s expected returns and risks.
“After reviewing it I am just not comfortable with this deal.”
This is such an important quote, and I’m really glad he said it. An investment can promise you X% returns during a specific time frame, but if you aren’t comfortable with the financial statements, the way the company generates revenue, quality of management, or any aspect of the investment, then don’t invest in it. Investing is only a means to help you reach your financial goals, it shouldn’t keep you up at night.
Bottom Line; I want to thank this reader for being comfortable enough to share his investment question with me and allowing me to share the outcome of our conversation with the readers of this blog. At one point or another, everyone has come across “great investment opportunities,” but unfortunately not all of them turn out so great. Like many other things in life, we get sold a lot of “great” things, but it is our responsibility to do our homework to make sure that product is for right for you.
On a side note, I was recently featured on The Pursuit of Happiness Blog. Feel free to see the Q&A I did there.
Also, I will be doing another post tomorrow as well on some recent financial news. I hope you’ll tune in for that as well.
Have a Great Day
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