Dream of joining the Net champagne set ends in defeat

I lost every penny that I invested. Although it was not the end of the world, a great deal of money had gone to my Dot Com dreams. The good part was that I still had my day job to survive, but the bad part was that I had to set aside my visions of caviar, yachts, and champagne. I had to return to basics and work my butt off for a living.

If you’re not among the smartest, don’t invest in a craze 

Before you make an investment in a start-up, you must ask yourself some serious questions. Are you smarter and luckier than Joseph Tsai (Jack Ma’s legendary partner)? If not, you should not follow a fad. If you are not an expert in the target industry or business type, you will most likely be the last investor to get on any particular bandwagon. 

You know about the target company and its industry? 

Just say no to unfamiliar investments or business plans. Do not invest in a business you do not know or about which you have little knowledge. Often, your “good” friends will put some “good” investment opportunities in front of you and you will be too kind to refuse. Be tough on each investment, treating each outlay as a completely separate venture, looking at all conditions, every time, because this is your money! 

Don’t walk into a casino if you’re not willing to lose it all 

Question the suitability of the investment to your risk appetite. Ask yourself: “Can the entire investment evaporate without putting a dent in my life? Most of all, don’t act as an angel investor in a company’s early stages unless you have more than US$100 million free cash to throw away and you love to help young people to be successful. 

Be ready to endure the long haul without reward

Look at the long-time horizon and ask yourself if you can survive without any returns for a long time. Otherwise, don’t act like a private equity investor, because it can take more than five to 10 years to have sufficient returns to exit, and that’s if you’re lucky.

Andrew’s takeaways – Avoid these errors to become a better investor 

Dreams can be very expensive investments 

Throughout our lives we will be approached by people with exciting dreams of business success. My blanket advice is: DON’T INVEST. Investing in start-ups is such a high-risk endeavor; the odds are you will never see your money again. It is an extremely rare case that you get your money back. 

Diversification is key, but you probably can’t afford it 

The best way to handle this type of high-risk investment in a start-up is to diversify. If you have $10 million, put $1 million in 10 different start-ups. If you have $100 million put $1 million in 100 different start-ups. This is a suitable level of diversification when it comes to start-ups. The problem is most people don’t have this kind of money to invest. So, they shouldn’t be doing it. 

Most people just wish they were angels 

A common angel investment story is that someone makes good money in an investment and feels overconfident and decides to become an “angel” investor (Definition: A person who sprinkles money on a start-up like an angel from heaven). The angel picks out a company that they like, and they put a bit of money into it. Within months, that start-up is gasping for money and the investor will have little choice but to add more. Most people won’t walk away from the money they have already put in (and lost) and, as a result, they put more money in and eventually lose it all. You will hear a loud thump as this angel falls to earth. However, I cannot deny that there are lucky ones; if you are one of those, please disregard this paragraph. 

Mistakes in this story 

1. Failed to do their own research 

• Inadequately researched type of investment 

2. Failed to properly assess and manage risk 

• Failed to match investments with risk appetite 

3. Driven by emotion or flawed thinking trust 

• Let emotions drive their investment decisions 
• Was driven by FOMO 

6. Invested in a start-up company 

• Invested in a start-up that lacked a clear business plan 

The post One of Thousands Who Followed the Herd to Big Losses in the Dot Com Era  appeared first on My Worst Investment Ever.

Thai company set up under 49/51 foreign/Thai split

He set up a company to administer the restaurant with paid-up capital of 20 million Thai baht (611,000 US dollars), which seemed more than enough for an initial investment and working capital. Because of the Thai regulations on foreign business ownership, he paid 49% under his own name and positioned his wife, Yingluck, as a 51% Thai nominee. All correct legal processes were apparently followed.

Thai wife manages chain as hubby hits the links

The day-to-day business of the outlet was managed by Yingluck while Kobayashi played golf on most days. The restaurant became very popular and expanded into several branches, all funded by the re-investment of profits.

Business, marital divorce leave proud investor with zero

Kobayashi was now very proud of his investment and celebrated by playing even more golf. This displeased Yingluck as he was not pulling his weight with any work on behalf of the restaurants. Disappointed with Kobayashi’s laziness, Yingluck sought a divorce, aided by her lawyer, Somchai. Somchai insisted that, in line with the registered shareholdings, 51% of the business should go to Yingluck, and 49% to Kobayashi. Of course, he was unhappy as Thai law supported Yingluck.

No one helps once-happy restauranteur get any return

Now he is left wondering when and how he can sell his 49% shareholding to someone willing to buy. Since the divorce, no one has come forward to buy his shares. No dividends have been paid to him. Rather large bonuses have been paid to directors, but he is now not a director. Meanwhile, the restaurant chain has gone from strength to strength in profitability and size. It turns out Kobayashi’s investment risk, inaction, the legal framework in which he was operating, and the lack of a path to sell his shares will leave him waiting for his return on the investment forever. To rub soy sauce in his wounds, his heirs might even be levied an inheritance tax on his holdings.

Andrew’s takeaways – Avoid these errors to become a better investor

Don’t start a business that’s illegal from the start

Many countries, including Thailand where this story occurred, have limits on the foreign ownership of companies. You may find it very common for foreign investors to set up structures suggested by lawyers to overcome these laws. But no matter how safe they may feel; the reality is that most of these structures go against the intent of the law. Of course, many people operate these kinds of businesses for decades with no problem. But if things go wrong, such structures can fall apart. In this situation, the structure was legally snatched away from this golf-hungry Japanese investor.

Nobody’s going to make money for you forever

You may find yourself in a situation where you are investing with someone who is doing a great job with your money. When faced with such a situation most people stop monitoring that investment. And eventually, things go wrong. In the above story, the investor felt comfortable and confident that his business partner (his wife) would be looking out for his interests, but eventually, things turned sour.

Be careful about doing business in a country you don’t know

It may seem exciting, and the opportunity may seem great, but doing business in a foreign country can be disastrous. Without deep knowledge of the language and the culture, things could be happening around you that you don’t even understand. It doesn’t mean it’s impossible to be successful, I have had my share of success in Thailand, but it means the trust between business partners is even more critical. Trust is probably the most important thing needed to be successful in a foreign country. Make sure to surround yourself with people you trust.

It rarely makes sense to go into business with your wife

It’s not impossible, and I’ve heard of success stories, but success in business with your spouse brings a whole new level of pressures and stresses on your relationship. The emotional roller coaster of business can be amplified by the personal emotions experienced by both of you. My advice? Enjoy your time in business and enjoy separate time with your spouse.

Our CoffeeWORKS story

How we made a partnership of friends work

Against all odds my best friend Dale and myself together built CoffeeWORKS. We are proof that doing business with friends can sometimes work. Three things helped us stay together: that we were in a foreign country so we really had to rely on each other, that from the beginning we said we would put our friendship above money, and finally that we agreed to place “principles before personalities”. This last point meant that if we were in a discussion about the strategy for the company that we agreed it was not all about one of our opinions winning. We both accepted the fact that we would be better off in the long run if we were able to compromise rather than try to “win” in a discussion. Over the years, our staff has witnessed our heated debates, but they always heard us say that we place “principles before personalities”, and therefore they saw us stop and come to a final agreement each time.

Mistakes in this story

1. Failed to initially research

• Inadequately researched type of investment
• Lacked knowledge of regulations

2. Failed to properly assess and manage risk

• Failed to diversify
• Bought an illiquid investment
• Lacked influence over management

5. Failed to monitor their investment

• Abdicated responsibility for their financial future

6. Invested in a start-up company

• Invested in a start-up that lacked a clear leader
• Invested in a start-up that lacked various sources of funds
• Invested in a start-up that lacked a clear business plan
• Invested in a start-up that lacked adequate financial controls

The post Silent Restaurant Partner Finds His Voice Too Late After Too Much Golf appeared first on My Worst Investment Ever.

I invested in a company operating in a dominant position of its segment within China’s processed–food chain. I liked the investment idea based on the theme that processed food consumption typically rises alongside a country’s rise in income and urbanization. We see this play out when branded products on the shelves of the modern food retail networks replace wet markets, butchers and greengrocers (produce markets). 

Business model in one country may not work in another 

This investment theme had worked very well in Europe around 20 years earlier. Back then it was more about industry consolidation and increased raw-material-pricing power. China appeared to have a massive, organic market for the taking.  

Long list of good reasons for investing can make investors blind to the bad 

The main points on which I was basing my investment were: 

• The company was already operating in its home market with scale advantages and market share in the early stages of the industry’s development. 
• Its position relative to customers was on the comfortable side of one-to-many. There were even benefits of customers consolidating their own industry in a massive conversion of traditional localized players to a modern branded and national platform. This rapid modernization accelerated the drive to reach every urban wallet in tier one and tier two Chinese cities.  
• The company was hitching a ride to a more expansive distribution channel. Its move could hardly be better. It could let the consumer brand owners deal with growth, brand goodwill, and marketing expenses. All it seemed to need to do was budget for expansion to match its customers’ volumes and keep the product quality good enough not to be rejected. 
• Its position relative to suppliers was also favorable. It was the main buyer from several producers of what was largely a by-product or discarded waste product. 
• There were no competitors using its technology in the domestic market, certainly none at the same scale, so the company had major market advantages. 
• Already operating in China, it was running at the lowest point of the international cost curve. Foreign competitors entering the market would have to be prepared to subsidize their China ventures for years to gain serious market share.  What did it matter?   
• This company was trading in the stock market at a very low price-to-earnings ratio (PE) multiple. If the international players drew attention to their activities in China, this company would only be undervalued. 
• The company clearly had growth, but its margins were super impressive: EBITDA was more than 40%, especially when compared to the low-capital-intensive production and the low volatility of demand from consumer growth. Consumption per capita was tiny compared to every other country at higher levels of per capita income. 

The positives outweighed the doubts  

This stock was one to buy and lock away, for sure! Well, that’s not how it turned out. With so much in the future looking so favorable, it was easy to overlook the high proportion of variable costs, especially fuel.  Sales were up, margins were high, so why be concerned with operating leverage?  

After about two years on from listing, management appeared to be delivering consistently. Enough in fact to overlook murmurs of the controlling shareholder and chairman dabbling in property ventures and the loans to directors that were rising over time. Other investors by this time had been reacting favorably to the story. There was a nice re–rating of the PE multiple. Earnings and price had favorable momentum and the brokers who covered this mid-market company loved the stock. 

But then, the momentum broke. 

Penny drops as management’s dark deeds and subsidiary failures hit main company  

The main shareholder had been more than dabbling in other business activities and more than just borrowing funds from the company. Furthermore, other company ventures were rapidly becoming liabilities and infecting the core business.  Worse still, material parts of the company’s business simply did not exist. The auditors, it turned out, had been complicit and, for whatever reason, chose not to speak truth to power, or in this case, patron, and went along with the deception. 

Amid tainted-food scandals, clean firms flourish but buyers walk from this one 

Meanwhile, the branded food processors were derailed by Chinese food-tainting scandals. The trends in consumer income, urbanization and modern distribution networks all continued to grow in quantum leaps, but this company’s products and share price were no longer rising in line with those complementary conditions. The trend could continue happily without this company or its suppliers. Consumers always have the ability to change their tastes and preferences. 

The stock went from a home run to only one cent on the dollar. It can happen so easily when you’re busy doing other things. 

Emotional about stock, investor ignored ‘lover’s’ flaws 

When we fall in love, we are willfully blind to the defects in the object of our affection. Picking stocks or owning companies can never be a love affair. There can be passion but only if it is a metaphor for our determination to be thorough in our research and mindful of the shortcomings of our own assumptions. But even then, a single company is rougher territory than the maps we draw in our minds of macro trends. 

Andrew’s takeaways – Avoid these errors to become a better investor 

Corporate governance damage can come out of nowhere 

Corporate governance events, where managers or owners act against the interest of minority shareholders, can happen with any company. There are two main types of corporate governance situations. The first is where the market is already aware that the company has poor corporate governance. This knowledge would come from observing the actions of the owners and management. The second case is when corporate governance events surprise and come from out of nowhere. 

Much less is lost when bad corporate governance is already ‘in the price’ 

If a company is already known for its poor corporate governance, then we can say that this is “in the price”, meaning, bad corporate governance in the past has depressed the price of the stock. Many investors would avoid this stock, but some would be willing to trade on the belief that the price cannot go any lower. They believe that investors have overly punished the company’s stock price and there is a chance to make money with the stock going up. 

The corporate governance event that matters is the one you won’t know 

But the corporate governance event that will hurt the most is the one that happens at a company where nobody expected it. This pain is because it will have the most damaging impact on share price when that event hits the market. This type of situation is almost impossible to detect before it happens. And you cannot always rely on financial professionals to warn you. There are various reasons why they may not raise a red flag, even if they start to get suspicious. 

A stop loss is one option to protect against corporate governance events 

Though most long-only fund managers are not interested in stop loss as a risk management tool, it does have some value in the case of corporate governance. One idea is to set a stop loss that’s deep enough that it would only be triggered by a serious bad corporate governance event. In my case, since I view stocks more quantitatively these days, I am okay with putting on a stop loss on each stock when I buy it. When the stock price hits the stop-loss price I sell; it doesn’t matter to me whether it is a corporate governance event or some other negative factor. 

Mistakes in this story 

2. Failed to properly assess and manage risk 

• Failed to consider cultural issues (in Asia, saving face, fear of giving bad news)  
• Lacked influence over management 

3. Driven by emotion or flawed thinking 

• Let emotions drive their investment decisions 
• Got too emotionally attached to an investment 

4. Misplaced trust 

• Failed to review a person’s history and references 

5. Failed to monitor their investment 

• Failed to review investment strategy regularly 

6. Invested in a start-up company  

• Expected idea from other country or region to work 

The post Single Stock Not Best Choice for Long Position on Macro Trend appeared first on My Worst Investment Ever.

In early 2017, I was shown an opportunity to invest in a US$6.5m simple agreement for a future equity (SAFE) note issued by BuildDirect.com Technologies Inc., a $1bn Canadian e–commerce company. 

All of business’ facets looked solid 

My client had made previous investments in the company and had a strong conviction in the team, the company, the market and this “new marketplace” opportunity. The company sells heavy construction supplies, such as tiles and granite, to contractors and home-improvement enthusiasts. 

Confidence builds when following ‘the smart money’ 

BuildDirect claimed to have developed an intelligent system to pre–position products in hubs around the country to cut the costs and time of delivery.  We were also confident because we were supposedly following “the smart money” – a major Canadian pension fund and other Silicon Valley venture capital firms were also investing. 

Many factors point to a ‘sound’ investment 

We were excited about the model; its artificial intelligence (AI) platform and the business opportunity and history of the company, which was 16 years old and had been grossing more than C$150m (US$120m) a year in revenues. We also had clients that used the company’s services.  We made the investment, which was around US$650,000. Within a few months we were notified that, as expected, our debt had been converted to equity. 

Ten months later, we learned that the CEO had been fired/asked to resign. He was the architect of the whole “marketplace” idea. Weeks later, we learned that the company had entered into receivership. It appears now to be a total loss. 

Even good ideas can lead to a premature fall 

Established companies can fail swiftly and dramatically. This company developed a very clever online marketplace, however they were utterly unable to execute it and ended up angering and losing their existing and long-standing vendors. 

Andrew’s takeaways – Avoid these errors to become a better investor 

Don’t blindly follow the smart money 

Just because big fund managers are buying into a company does not mean that those fund managers are right. They could just as much be wrong. Don’t take any comfort that you are investing with the “smart money”, meaning the professional investors. They are often under career pressures and other pressures that can lead them to bad decisions. If you want to invest, take the time to build your style and plan, and then follow it. An individual has considerable advantages compared to the pros. 

Have an exit plan 

No matter how good the investment is, no matter how experienced the others who you are investing in are, and no matter how much research you have done, always have an exit plan. Investing involves too much uncertainty; having an exit plan allows you to pre-plan what you will do when things go wrong. 

Mistakes in this story 

1. Failed to do their own research 

2. Failed to properly assess and manage risk 

• Assumed past performance would continue 
• Bought an illiquid investment 
• Lacked influence over management 

3. Driven by emotion or flawed thinking 

• Let emotions drive their investment decisions 
• Were driven by FOMO 

5. Failed to monitor their investment 

• Failed to review investment strategy regularly 

6. Invested in a start-up company 

• Invested in a start–up that lacked various sources of funds 

The post How Poor Execution Turns a Great Idea into the Worst Investment appeared first on My Worst Investment Ever.

Too many carrots in one basket

Fortunately, we had a big break when we signed a deal with Fitness First centers to provide 10 of its prime branches with our raw juices. We were contracted to deliver 1,200 bottles a month, which meant monthly revenue of 120,000 Thai baht (THB 100 per 250 milliliters). Sadly, not many Thai customers understood the considerable benefits of drinking raw juice. It also seemed almost impossible to succeed from leaving the product to sell itself without a salesperson present.

Stock longevity and margin problems effect operations

Moreover, the juices’ shelf life was only five days, and that was in a refrigerator that maintained the bottles of juice within a strict temperature range. We spent nearly all of our money producing the juices and the sales were low. Nevertheless, we decided to continue with Fitness First because we believed having one of the top-five global brand fitness centers on our client list would boost our reputation.

Cash flow problems squeeze life out of funds to keep business running

However, around about that time, we ran out of money for further investment to scale up to the point enabling us to sustain operations or make a profit. In the end, we had lost more than 50% of our original investment. We tried to survive by setting up a kiosk-type channel on-site (Fitness First), selling juice by the glass, but that strategy failed to save us and we ended up selling to an English investor, who noted however that our branding was quite good.

Business scale, marketing, branding and customer awareness are vital

We learned that only the right business size will lead to a beneficial investment, that marketing and branding are vitally important, and that product development is one thing that cannot be ignored. Finally and crucially, understanding customer needs and behaviour are at the heart of a consumer goods enterprise.

Andrew’s takeaways – Avoid these mistakes to become a better investor

Logistics and inventory matters more than you think

It is often the case that new start-up companies place little focus on both inventory and logistics. When my best friend Dale and I set up our CoffeeWORKS factory in Thailand we spent the bulk of our money on the factory and the roasting machine, and did not think much about the inventory. But, when we contacted the green coffee-bean supplier, we found that he required a very large minimum order and since we did not have any history with him, cash on delivery. Those two things nearly killed our business.

In the above story, the perishability of the product was a major issue; this caused the product to need to be refrigerated and delivered often. Compare this to protein or energy bars that might be sold at a gym. This idea was not impossible but the cost of implementing it would probably cause it to fail.

Ignore working capital at your peril

Our recent research shows that about 60% of assets of companies around the world are long term, with the remaining being short-term, current assets. It is natural for traditional start-up companies to forecast their cash needs for long-term assets such as machinery and the like.

From my experience, most start-up management teams miss the current asset items. There are three main current asset items that a company must plan for or risk running short of cash: accounts receivable was on average has accounted for 13% of total assets, cash 10%, and inventory is 9%.

Mistakes in this story

6. Invested in a start-up company

• Invested in a start-up that lacked a clear business plan
• Invested in a start-up that lacked a competitive advantage
• Invested in a start-up that lacked adequate financial controls
• Invested in a start-up that lacked various sources of funds

Learn about the six ways you will lose your money and how to avoid them here.

The post Start-Up Entrepreneur Runs out of Investment ‘Juice’ appeared first on My Worst Investment Ever.

Throwing good money after bad was an exercise in sunk cost and saving face

And the reason it was a bad investment was that after I started investing, I got into a cycle of giving them more money when they were desperate. And, it ended up being an exercise in sunk cost and the social difficulty of saying “no”, an exercise that ended up being quite expensive.

Andrew’s takeaways – Avoid these mistakes to become a better investor

Fundamental questions to ask about a start-up before investing in it

To avoid the above story when you look at investing in a start-up, I suggest you put it through the following test. But, don’t do it alone! Because you will be overly optimistic, I suggest that you test it with your most skeptical friend, oh, and write it down. If you get a “No” answer as you move through these questions just drop the whole idea (I learned this from my own losing start-up investments!) Question 1: Do you trust the person/people running the start-up? 2. Is the idea good? 3. Can this team execute the idea?

Ensure there is more than one funding resource behind a start-up

It is too easy for a start-up to rely on the original person who brought money to the deal. Sometimes the money source thinks that they can hold a larger share of the business if they don’t bring in other investors. But this thinking can lead to the trap of being the sole supplier of capital. Before you put money in a start-up, work with the founders to identify the next sources of funds. Then require the management team to pitch to these sources, go with them, see how it goes, then use that information to determine if you will invest.

Mistakes in this story

1. Failed to do their own research

• Failed to do their own research

6. Invested in a start-up company

• Invested in a start-up that lacked various sources of funds

Learn about the six ways you will lose your money and how to avoid them here.

The post Being the Money Man for Friends appeared first on My Worst Investment Ever.

Weak expertise, poor sense of duty, and gender imbalance were key faults

Firstly, all the team members were working full-time and joined in with this business as a part-time job.

Secondly, none of us co-founders were coders or programmers, as we were all from marketing and sales backgrounds and did not have huge sums to invest in hiring a full-time coder.

Lastly, the nature of the business was centered on women, and three out of the four partners were men, who were not interested in the type of products we were offering.

Believing in a business and acting with dedication are crucial for success

What I learned from this was to never invest in a business in which the team members are not fully committed; that there always needs to be at least one team member who is really into the industry or has accumulated experience in it. And finally, apart from commitment, passion from the management team is essential.

Andrew’s takeaways – Avoid these mistakes to become a better investor

Investing in a start-up – just don’t do it!

Investing success is hard enough, start-up investing success is nearly impossible. All odds are against a start-up. Why would you trust your hard-earned money to such a high-risk investment? Oh, I know, “It just feels right”, or “it’s a hobby, I don’t mind if it fails” or “Nobody has come up with this idea”, etc. The reality is that survivorship bias is acting so strongly in this area that it will empty your wallet. All those successful start-ups you see, they are the very few survivors. What you don’t see is the graveyard of dead start-ups, trust me, it is an ugly place. So, about start-ups, remember my advice, don’t do it!

But if you must, the key to a sustainable start-up is a visionary leader

Key-man risk is a major risk in investing. If the key man exits, for most businesses the company collapses and all money quickly evaporates as the remaining staff fumble and fiddle to try to recover from the loss. But in this story, the opposite is the case – there was simply no true leader, no visionary. Without that person, most businesses will eventually fail. So, if you have the choice, invest with someone like Steve Jobs, the key man.

And what puts this company’s goods or services ahead of its competitors?

When it comes to start-ups, the founders and managers will be pulled in all directions and resources will quickly disappear. So, if you do invest, at least make sure that the company has one little niche where it has a competitive advantage. Finally, it is critical to stay on top of your investment, keep information flowing about what is happening, if not you could wake up one day to a big loss.

Mistakes in this story

5. Failed to monitor their investment

• Failed to review investment strategy regularly

6. Invested in a start-up company

• Invested in a start-up that lacked a clear leader
• Invested in a start-up that lacked a competitive advantage

Learn about the six ways you will lose your money and how to avoid them here.

The post Lack of Commitment Can Deal a Death Blow to an Investment appeared first on My Worst Investment Ever.