Financial Literacy

When you have saved up a little money, it is tempting to get into private placement investments. These are investments that are direct – between you and a business operator. Common examples include real estate deals, business startups, raising cattle, oil wells, gold mines, and private loans. These investments are riskier and more difficult to exit than a regular stock, bond, or mutual fund.

While these investments are very risky, investors are attracted to them for their potential gains. Some of these investments offer high yields, say 8% interest plus the potential for capital gains. This is very enticing when bank CD rates are under 1%.

An acquaintance of mine lost $75,000 in a restaurant investment, 100% of the money he put into one of these private deals. To me, this was a predictable loss because he performed zero due-diligence on the investment before he gave them his money. He did no investigation beforehand, and was dying to get into his first “deal.” Let’s go over what he did wrong so we can learn from his mistakes.

1. No Education. His investment was made into a restaurant and he knew nothing about the restaurant industry, and made no effort to understand the business before he invested.
2. No Successful Mentor. Even if he had some education, he did not locate a proven, experienced, and successful mentor willing to help him. A mentor like this can help steer you away from bad investments and toward good investments.
3. No Independent Research. He made no effort to verify the claims made by the operators. He did not visit the site to see for himself if it was a good location and if their prior restaurant was successful.
4. Not Knowing the Partners. He made no effort to learn the backgrounds and reputations of the partners in the business making decisions. Do they have a successful track record or have they left a trail of ruin?
5. Not Understanding Value. The most important aspect of any investment is value. The investment may be great, but if you are paying too much, then it will be a bad investment for you. If it is a poor investment but you get in at a low price, you minimize any potential losses. You MUST know if you’re buying in at a good price or a bad price. You need to have valid reference points to make this evaluation and most investors make no effort to understand this.
6. No Analysis Experience. If you are unfamiliar with, let’s say investing in restaurants, then you need to examine 100 restaurant deals, in detail, to gain experience. This is how you’ll begin to be able to distinguish between a good investment and a bad investment. If you’re switching to gold mines, then you need to start analyzing 100 gold mining deals.

No matter which type of private investment you are making, these 6 points-of-protection are critical due diligence to make an educated decision. If you fail to thoroughly go through these steps before you make an investment, then I predict you will lose money on this investment. Learn from these hard-won lessons and go through the 6 steps before you hand a hard-won penny to anyone.