PAUL’S INVESTMENT EXPERIENCES

Welcome to this fourth post in our series on Investing.

The lure of a great return – if you’re not careful or disciplined – will make you do things that don’t make sense. As your investment portfolio grows, it’s critical that you remain focused and keep your head thinking right.

I have made several mistakes that have cost me significant dollars. One of the key motivations for starting this blog was to share some of the fundamental lessons I’ve learned, which will hopefully keep you from making the same mistakes I made. Even with due diligence, experience and the skill of an exceptional team I have still learned a lot of lessons. I therefore began to document them all as they happened. Every time I learn something it goes on this list and for years my team and I never made an investment without looking at this list.  Even now, we know it well and refer to it at least once a quarter. If you haven’t already, I recommend you read or listen to the previous blogs on An Investor’s Perspective and Developing a Sound Investment Strategy before going into this.

WHETHER HIGH OR LOW, YOU CANNOT HAVE A RETURN WITHOUT RISK

As an investor, before committing to an opportunity, you should analyze and attempt to qualify and quantify the potential risk of that investment. Every investment involves some degree of risk. Having a clear perspective of risk and its potential sources helps you better evaluate the opportunity and costs involved. Key areas to look out for risk include:

 

Sponsors

• Before doing business with someone new, be sure to review at least one of their previous investment transactions. A character assessment is essential.  Know the individual as much as possible, including their reputation and values. Be aware of their history and track record from past transactions.

• Try to establish if the sponsor has a positive historical experience of the asset class you would be investing in. Be cautious or scale back on the investment amount if they do not have extensive positive experience.

• When dealing with a sponsor, personal assurances from them should not carry the day and should not be what you give much weight to in evaluating the investment.

Stay on Top of the Details

• Avoid being a passive investor in anything. Be prepared to do whatever it takes to minimize the chance of loss. Aim to be an investor who adds value. We have mitigated losses on many investments because we got involved and helped with the exit strategy. If you don’t invest the time to take care of problems, your problems will be far greater. As you go in, it’s important to have a strategy up front to manage any problems that may arise.

• Be careful not to throw ‘good money after bad’. Meaning when you already put money into an investment, and it’s not doing as well as you planned, there can be the temptation to save the initial investment by adding more money to it. However, when the deal is not going well, you need to be objective, put emotions and pride aside, and understand the situation. If you want to put additional money in, evaluate the decision as you would a brand-new investment; just because there’s money in it already doesn’t mean you should invest further.  Look at it with the same amount of detail as when you started.

• If the return is too good to be true, it probably is.

Private Investments

This asset class includes venture capital, private equity, real estate, and hedge funds. When investing in any of these, I have understood the following:

• Private equity and venture capital investments are effectively addressed through funds, which allow diversification, access to successful managers, and minimizes time spent monitoring investments.

• Individual private equity deals must be pursued with sufficient due diligence to assess the risk of making the investment. If we are investing over a specified amount, a site inspection must be complete so we can meet the team and see their offices.

• Avoid investments where you don’t understand how the investment works, how money is made and what risks exist. Even if their past performance looks great, understanding what you are investing is critical.

• No Guaranteed Success – The experience of the CEO/Principal managing the investment is a positive consideration, but they do not guarantee success.

Due Diligence

A thorough review and audit of facts and details should be done before entering into any investment. Due diligence can cover a number of areas including:

Site Inspections

• If we’re investing over a certain amount, we will visit the business offices, meet the team, and audit what they’re doing. You can learn a lot when you observe where one operates, their culture and the people at different levels of the organization. This exercise takes time and may require several visits, but we’ve found it to be highly valuable.  For all real estate investments, we tour the site and the neighborhood.

Character Assessment

• It’s not enough to go on personal assurances from the person sponsoring the deal. It’s important to know the individual as much as possible, their reputation and their values. We’ve found it beneficial to invest with people who have high integrity, solid character and manage their personal life and investments with the right values guiding them.

• A point to note: Avoid working with brokers when possible. It is better to work directly with the person who is structuring the deal and managing it all the way to exit.

Don’t rely on third-party due diligence

• The longer I’ve been around, the more I’ve come to appreciate my gut instinct and intuition. It’s worth paying attention to when something doesn’t seem right. I always tell my kids, when something looks too good to be true, it usually is. Don’t rely solely on others and trust your gut.

Black Swan

In the investment world, a black swan is something that doesn’t happen very often. It usually comes in from left field and there’s no way to accurately predict it. For examples:

• national disasters

• pandemics

• war

• terrorism – like 9/11

These are all incidences you would never have anticipated but they changed the world and impacted investments. A black swan is something you cannot underwrite. Investing with an awareness that black swans can happen will help keep you committed to diversifying and will help you feel better about a 5% maximum investment.

As you develop your investment strategy and look at your risk tolerance; remember to factor in how to deal with unknowns and things outside of your control. 

ACTION STEPS

As you continue to grow in your investment journey, the intentional decisions you make will better inform your next investment. Take time to sit and audit any lessons you have learned from your past investments and begin to create your own list. I have also included a handout with a Comprehensive List of all my learnings for your reference. Use what I’ve learned as well as your own experiences and insight to guide you as you make future investments.In the next two blogs we will look at Investing and Relationships and Once You’ve Made It, How Not To Lose It.