Investor puts singular belief in property salesperson

I just believed what the real estate broker told me and now I’m at risk of defaulting and losing all the down payments that I have made over the course of more than two years, which amounts to 350,000 Philippine pesos (US$6,551). 

Apparent ploy has building finished ahead of schedule 

The broker had originally told me I would have four years to pay off the down payment at zero interest, but the condo project was completed in just two years. Now the developer is demanding full payment for all the outstanding balance, which amounts to 3 million pesos.  

Failed to look at hidden fees, developer’s reputation  

I also did not know that there would be miscellaneous and bank-processing fees that would pile up to hundreds of thousands of pesos. I have been talking to the banks but I do not qualify for a loan. I also found out recently that the developer has a bad record for customer service.  

Lack of checks can wreak havoc on a portfolio 

I was unprepared for all of these issues to arise and I have been stressed for more than two months already. If I could go back in time, I would double check all of the broker’s promises, clarify the vague statements in the contract, and ask previous homebuyers about their experience with the developer. 

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

Check the references not given 

A critical step when you invest with anybody is to check references. Your first step in this process is to ask the individual or company if they have some references to recommend. But of course, expect these references to give good recommendations. True due diligence means to try to seek out people who have dealt with this company or individual before. Ask everybody you know if they have had any experience with this company or individual. Work hard to seek out the people who have worked with them and get references from them. This is where you find the really valuable things that can better help you make a truly informed decision. 

What matters is that you have the cash at the time of transfer 

When buying a condo that is about to be constructed, it’s critical to try to understand when it will be completed. It is at that time that full payment will be due. Right from the beginning, work with the banks to make sure you have financing lined up on that day. And from this story, we have learned to make sure you ask: “What if the condo is finished early and I don’t have bank financing lined up at that time?” 

Mistakes in this story 

1. Failed to do their own research 

• Relied on the assumptions of others 
• Neglected to read contract completely 

2. Failed to properly assess and manage risk 

• Bought an illiquid investment 

4. Misplaced trust 

• Failed to review a person’s history and references 

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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.

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.

CEO and board dysfunction prove damaging

The investment appeared to promise a potential 500% return over three years. Two years later, it was looking as though we would be lucky to recoup any of our capital. The company had a dysfunctional board that lacked diversity and was very confrontational. There was also a bad decision made over the choice of chief executive. This CEO had invested in the business but worked part-time and blamed everyone else for his failings.

Poor marketing, resourcing, and grasp of legal landscape

Moreover, there was no clear marketing strategy or resourcing, which had an impact on sales. The final straw was the company’s failure to anticipate regulatory changes driven by an attack on the company’s after-hours business model by the day clinic/general practitioner political lobby group.

It was all very sad but with it came a big lesson. To avoid failure in the early stages of starting a business, make sure to put the basics in place.

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

Putting money in is not the problem, it’s getting it out that can be trouble

Investing in unlisted private companies poses a unique challenge because it is very difficult to exit when you are no longer satisfied with management.

A minority stake in a company means when it comes to the crunch, you have no voice

Another risk in owning a minority stake in any company is that, as a minority, you do not influence the way the business is run. When you are an employee, there are times when management will offer for you to earn shares in the company instead of pay. My advice is generally to avoid such an offer. This is because you will have no control over the management of the company, you will have deferred your compensation, and, if things go wrong, there may not be a buyer for your shares.

In this story, the investor suffered because they had no control over the board or the management. An exception to my advice on not owning shares is if an established company offers additional compensation through shares as an incentive program; particularly when the company sells those shares to employees at a discount. But in such a case, be careful of building up too much of your wealth in one investment; if things go wrong with your company you could lose your job and your wealth, a double whammy!

Ability to depend on the expertise of a company’s leaders is crucial

Another risk to consider is that of the changeover of management. This was risk arose in this case when new management took over a family-run business. In such cases, investors expose themselves to the risk that the new management is unable to make the business successful. The lesson is to stick to proven management if possible.

Avoid investing in people you just don’t know

Another danger in this story is the risk of investing in people you don’t know, the new management. Be very careful in situations in which you are investing in people you don’t know. If you insist on doing it, make sure to do your research on the peoples’ past decisions and relationships.

Mistakes in this story

1. Failed to do their own research

• Lacked knowledge of regulations
• Let things get too complicated

2. Failed to properly assess and manage risk

• Bought an illiquid investment
• Lacked influence over management

4. Misplaced trust

• Failed to review a person’s history and references
• Were overconfident in an unproven management team

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

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