How to Ensure You Don’t Lose Money Part 4 (due diligence)

One of the best insights to ensure you don’t lose money is especially visible if you watch how Bill Gates behaves and thinks.  He’s interesting because he rarely gives much public advice so in order to extract his evident wisdom on business and investing you need to pay attention not to what he’s talking about but how he’s thinking about what he’s talking about and reaching his conclusions.  Here we derive an insight without which the others aren’t important:

Get good quality data

Most people make investment decisions based on the information supplied to them by the investment sales person, someone being paid by the company to sell you the investment.  Just ask yourself how unbiased is that information source?  Even worse both investment advisors and investment sales people are rarely very knowledgeable about or skillful at investing and generally ignorant of this fact.  Try quizzing them on some of the investing fundamentals shared here to get an idea of where gaps in their knowledge lie, do they understand cycles, what causes them and how to read them?  Do they understand what phase you are at in the cycle and what sort of investing behavior should take place as a result?  Do they have a meaningful understanding of risk?  Do they have significant risk mitigation strategy in place for a given investment?  If not you should walk away.

Sadly many unskillful investment sales people sell to and misadvise their friends and family

Where else do people look for investment advice?  Often they’ll pick up tips from their friends or family, individuals who likewise probably understand little about how investing works, how markets work, etc.  One of the best ways to dig into their knowledge is to determine how much they know about and are putting into place legitimate risk mitigation strategies, strategies to protect against the downside.  Most people are naïve about this thinking only of the upside or being pessimistic about the prospects as opposed to taking a coolly rational view (investing is rational) that neither gets excited nor discouraged and instead carefully lays out all the things that could go wrong, evaluates whether measures are in place to protect against these things and also evaluates based on solid third party verified data where the upsides will come from.  Don’t trust those directly involved, make sure every shred of data is high quality.

Disregard anything you are told about projected rates of return they are merely fantasy

Until returns are realized they mean nothing and once they’ve been realized that’s the end of it.  Too many investment brochures are built around headlines advertising some rate of return like 8% or 15% and those might be accurate or they might not, but the key is what’s the data behind the investment and how will it result in those returns?

This is perhaps the most painful part of investing, doing extensive research and verification to understand what you’re investing in and ensuring the data is real and accurate.  You’ll inevitably pay attention to data points that don’t matter early on “noise”, and miss points that are critical, that’s why you need mastery in investing like anything else.  But no matter how solid your models are, no matter how much you understand the market, the investment, the risk, etc. if the data you’re basing those assumptions on is wrong it can ruin everything.

Bottom line make a habit of always seeking out very high quality data and lots of it with respect to any investment you’re going to make, it will help protect you from the wrong decisions over and over again.

I once had a client we were consulting for who was going to loan $150k on some property for a development.  He was told he’d be given security on his money in the form of one of the lots, which was worth that much.  We got involved and asked the developer about the security they assured us it had a solid value based on comparables within the market.  “Perfect”, we replied, “just send us over those comparables and data, we should be able to get this taken care of right away and authorize the transfer”.  Suddenly their story changed “well it’s very difficult to get comparables for this kind of property…”  It turned out when we did independent research that the property in the environment where it would need to be sold to repay the loan was worth about $15k one tenth of the stated $150k.  A simple set of questions and extra bit of investigation that probably saved $150k.  Good use of time?  Much better than the ROI he would have gotten off that loan that’s for sure.

Get great quality data for all your business and investing decisions!

If you’ve got investing questions you’d like to discuss or like us to cover please click “Ask a Business Question” in the lower right corner of the screen to send it to us, looking forward to hearing from you.

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