Investing your hard earned money in the hope of a return carries risk. Investments vary widely from relatively safe to speculative to snake oil. Here is what I have learnt through hard knocks of investing in other people’s projects.
- Always use Charlie Munger’s philosophy: Trust first, ability second.
- Vet the person before the project. Even the best projects go sideways when run by an idiot.
- Vetting is done from many dimensions such as character, values, skills, experience, team etc. A person with great skills and no ethics is nothing but a smart conman. On the other hand, a ethical person with no skills is just a well meaning individual who needs to first go to the school of hard knocks using their own money.
- Looking up someone online is not vetting. A shiny reputation online means nothing. Most conmen have pristine online resumes and recommendations until they unravel.
- Dig into their own experience using their own money. Too many sponsors show experience by association rather than actual past execution.
- Pay close attention to sales and marketing efforts. The higher the effort in marketing, the less stellar the sponsor is.
- Sponsors who employ army of sales people and have state of the art website and glitzy presentations spend too much time and money on marketing and less time finding and running great projects.
- Pay attention to marketing material – is it condescending or does it get into the details? Does it play to emotions or to logic? Conmen often prefer appealing to emotions.
- Pay attention to the sponsor’s lifestyle. If they have adopted a flashy jet-setting lifestyle that is designed to impress, be wary.
- Ask uncomfortable questions. How do they make money? How much money would they make if project goes well or goes badly? What are the obvious and not-so-obvious fees? How much money would they make if the project goes bust and you lose your money?
- Look for signs of “skimming over details” in conversations, in provided documents and in answering your questions.
- Ask for reports of past projects. Look for the level of details and transparency in reporting. Do they share only their greatest hits or some failures too?
- Ask for related parties/entities involved in the project. A common con is to pay inflated charges to a related party. They look like legitimate expenses on the books but are a backdoor to suck all profits from the project.
- If the sponsor employs other people, how long do the employees stay and what do they think of their employer? A good proxy of a person’s character is how they treat their subordinates/employees.
- After you have done everything you could, remind yourself that investing is a calculated risk. You can do everything right and still lose money. If you can’t handle complete loss of capital, start small.
- Treat investing as a marathon, not a sprint. As long as you do not take a risk that knocks you out of the game, consistent investing over long term will pay off.
- Podcasts, investing sites and above advise may fill gaps in information but true knowledge is only revealed through action. So start somewhere, however small.
