171 - How Investments Go Wrong

Unfounded speculation is the most common way that “great deals” become bad ones.  By unfounded I mean that the parties involved failed to thoroughly complete their due diligence.  This happens to both investors and deal sponsors.  Far too many passive investors fail to thoroughly understand the investments they participate in.

This episode applies to investors and sponsors.  Investors for the sake of this episode are considered as those who are infusing capital into the deal, Sponsors, on the other hand, are the ones who are sponsoring the deal (have it under contract)

Never take the word of the person selling you something as the final truth, instead, learn the investment opportunity until you understand how it will be able to pay you.  What you wind up with matters less than HOW it will come to be.  Don’t allow lofty projections get you all excited, that’s a quick way to the poor house.

Not asking enough questions (or the right ones) often leads to disappointment.  I speak with investors all the time who don’t ask very many questions.  Some say that they feel if they ask too many questions they might be dismissed as a newbie.  Don’t become a victim of your own insecurity, ask all the questions you need to be comfortable with the opportunity before you.

Want expertise? hire an SEC compliance Attorney to review your documentation and offering.  You can book time on my schedule to submit a deal review if you want a second set of eyes on it.

Sponsors, don’t get sucked into the terrible advice of “fake it till you make it”.  Instead, teach what you know, and always keep learning and sharing as you learn.  Sharing with others in the form of teaching is how you develop expertise.

Investors..What can the deal afford to pay?; How can the deal afford to pay that?  The answers should be crystal clear, if not..stop and figure that part out.

Ask your sponsor what happens if the data or research is incorrect or inaccurate?  How will that be dealt with? Can the sponsor be fired in the event of poor performance? What happens if the sponsor gets sick, dies, whatever, who takes over?  Is Key Man Insurance included for investors? These are just a very short list of questions investors need to ask and sponsors need to be prepared to answer.