Ep81: Catherine Flax – How to NOT Lose a Friendship When Investing

Catherine Flax has had a distinguished multi-decade career in financial services, fintech and commodities. She is currently an advisor and board member to numerous start-ups and mature businesses, bringing expertise in business and strategic growth, innovation, talent development, regulatory affairs, and more. Catherine was the CEO of Pefin, the world’s first AI financial advisor. Before Pefin, she was the managing director and head of commodity derivatives, foreign exchange and emerging markets sales and trading for the Americas at BNP Paribas, was chief marketing officer at J.P. Morgan, as well as the CEO of commodities for Europe, the Middle East and Africa.

 

“What I didn’t factor in was what might be the damage beyond the dollars … I put myself in the position of mixing friendship and business, (and) that it would destroy a friendship.”

Catherine Flax

 

Worst investment ever

Catherine had been a professional in financial services for some time when she got into her worst investment about 15 years ago, so she was well versed at examining possible outcomes and potential loss cases.

A good friend approached her with a business investment that was outside of her usual range of expertise. It was an established business, not a start-up and, from an analytical point of view, she was thorough in examining the probability of loss, the upside and all the typical calculations a financial professional goes through before getting involved. She did however neglect to factor in the “damage beyond the dollars” if the investment did not pan out.

While the outcome was not beyond her expectations of the potential downside risk, the investment did not go well. So her math was fine. But, as this was the first time that she had mixed business and friendship, she didn’t realize the biggest loss would be the friend who had involved her. For Catherine’s part, she wasn’t angry about the financial loss, but her friend was so embarrassed that the friend felt too uncomfortable to maintain ties with Catherine from that time onwards.

In retrospect, Catherine feels that the outcome should have been obvious to her, but that it was not a result she had thought about at the beginning. While she calls this damage, “irreparable”, she was happy to say that similar arrangements have worked out better since this time.

 

Some lessons

Be very cautious about going into business with friends. Communication, as with all relationships, is paramount. Vital are clear conversations about exit strategy, as in a normal business. Discuss how failure could affect your friendship and “really look somebody in the eye” to help them understand that a bad outcome is certainly possible. Then you can move forward as friends, if not as business colleagues, when a venture or investment doesn’t turn out as positively as was expected.

 

Andrew’s takeaways

Place principles before personalities in business. This is a powerful concept that offers a simple guide on how to survive without letting our personalities destroy us. Our personalities are ultimately driven by fears, and not higher thought or principle. In his own businesses, Andrew has practiced this and even made an agreement with a friend and business partner that if they ever felt their business was going to destroy their friendship they would close the business.

 

Actionable advice

Sit down and think deeply about the worst-case scenario in an investment or business venture and what you would do if the friend or person you’re in business with is angry or humiliated. Plan and set the stage to be helpful, to let them know that you are still their friend, and to not let this bad decision or investment ruin your friendship. Then you can make the investment after having the planning conversation and most likely you will be able to mitigate a bad social outcome, even if the financial outcome falters.

 

No.1 goal for the next 12 months

Catherine aims to continue advising the numerous companies she is linked with and help them flourish to the best of her abilities this year, and to avoid all the kinds of mistakes discussed here and in other episodes of My Worst Investment Ever.

 

Parting words

“This is such a great format. I’ve enjoyed the previous podcasts and thank you so much for having me.”

 

 

You can also check out Andrew’s books

Connect with Catherine Flax 

Connect with Andrew Stotz

 

About the author, Andrew

Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company that provides institutional and high net worth investors with ready-to-invest stock portfolios that aim to beat the benchmark through superior stock selection.

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