A few war-wounds later and now that I have a few successful investments under my belt, I’d like to share with you in this article what experience has taught me are important considerations when making any investment.
Particularly which questions to ask.
Here are 9 questions I think it’s essential that you ask to validate your investment before pulling the trigger.
NOTE: An investment is not necessarily something big, you can ask these questions for any investment from buying a jar of coffee (though the impact of getting it wrong is obviously a lot smaller) to paying for services, buying a course, buying a house or buying a business.
1. Who am I investing with?
How much do you know about the company or person you’re investing with?
In the jar of coffee example, people often go for brands because they trust them and the brand gives consistent quality in the product.
Imagine you could get the same amount of coffee for 10% of the cost. Would you be interested?
Now imagine that the cheaper coffee was offered to you in a paper bag with no label and was from a stranger you had never met and knew nothing about. Still interested?
The same is true of any investment – it’s important to know as much as possible about the company you are investing with, whether it’s a straight-forward purchase or a new business relationship. Find out everything you can about them. Is there anything that concerns you?
2 – What is the MINIMUM ROI?
What is the minimum Return on Investment (ROI)? In the case of coffee, it’s probably a few months of the same quality of coffee you usually drink, depending upon how much coffee you drink. In the case of investing in assets (shares, business deals, real estate) the minimum ROI is the worst case scenario return on your investment.
You need to look at the worst case scenario so that you are (financially) prepared for it.
Does it still work if you only get the minimum return? Consider the time element here too.
Sales people (whether a middle-man or broker) will often sell to you on the basis of possibilities or best case scenarios. This is not the conversation you want to have – cut it short as soon as politely possible and make sure you are getting a fair and comprehensive appraisal of the worse case scenario. Otherwise you risk being over-sold to (very easily done in this day and age) and potentially getting yourself into hot water.
3 – What are the Risks?
Every investment comes with risks. They may be hard to spot but they are there all the same. With more commoditised purchases usually the risks are minimal or covered (back to the coffee jar example it’s very unlikely that human error would lead to anything other than the actual coffee you’d expect in there being put in the jar and if you did end up with a jar of something else or with any other problems with your jar of coffee, you could very easily exchange it or get your money back).
Usually the market dictates that if you want a bigger return, then you have to take more risk. That’s just simple economics. You’re very lucky or very clever if you find any significant exceptions to that rule – and if you do, please let me know.
An example in my case is a land investment I made abroad. The deal was structured in such a way that I was promised a bulletproof guarantee on my return, both in terms of timing and profit. I asked about natural disasters. My investment partner thought I was crazy to bring up such a thing. He thought I was just being difficult because he said the deal was risk free and I came up with that. I went ahead with the deal anyway. There was a big earthquake in that country a few months into the deal and it had a huge impact on the project.
There are always risks. Don’t let anyone tell you there aren’t. Find them and make sure they are accounted for (managed, insured, transferred, mitigated) or that you’re comfortable with them (i.e. you’re prepared to take the risk because it has minimal probability and it’s a chance you’re happy to take or minimal impact – you wouldn’t care too much if it did happen).
A quick example of minimal probability – laser eye surgery. There is something like a one in a million or one in 10 million chance of blindness with that operation (I don’t know the exact figures but you get the point – plus it’s changing all the time, but the probability is really tiny). The risk may be tiny but it’s still there. Blindness! Yet people still take the gamble and happily get laser surgery to improve their sight when they could easily just wear glasses or contact lenses. (This one’s not a risk for me, I am happy with my contact lenses).
4 – What is the Exit Strategy?
If it’s a long term deal we’re talking about, then there should be an exit strategy. This may be as simple as just selling the thing you bought (e.g. car, house) because it’s costing you too much money – or if contracts are involved it may be something you have written into the contracts from day 1 (e.g. a monthly return for 10 years at X% with a buy-back option in years 2, 5 and 7 – the buy-back is your exit strategy because it gets you out of the deal).
The thing about long term investments is that things change. Whereas your deal might be set in stone, the world isn’t. It keeps turning. Economies change, technology advances, your own situation is constantly changing too. A good rate today may not be a good rate in 3 years time. The asset may not perform how you expected over time or may be something which falls out of favour affecting the return.
Make sure you at least consider an exit strategy and if it would be important for your investment, understand what it is.
5 – Is there a Guarantee?
A guarantee offers reassurance and often minimises one or more risks in the investment. If I offered you a great property in a fantastic location, you might be interested. If I offered the property with a guaranteed yield of 10% of your initial investment per year and the banks were lending at a small fraction of that number in interest, you may bite my hand off. At this stage you should rightly be asking “What’s the catch?”
Deals like the example I give here do exist. Plenty of them. Yet they are not snapped up like hot cakes. Why? Read again point 1 and point 6 below – because people don’t trust the company or the guarantee – and they’re right not to. Often there is some small print you really need to seek out and explore.
Guarantees will often be very well thought out and structured. Look at it through the eyes of the guarantee provider. How can they afford to give such a guarantee. It may be an easy answer, in which case, fine. If it’s too good to be true, then either you haven’t understood it properly or it isn’t (true).
6 – Can I trust the Guarantee?
As I began to allude to above. Once you have established if there is a guarantee associated with your investment you really need to kick the tyres. Find the small print. Make sure you fully understand the guarantee. Are there circumstances when the guarantee doesn’t pay out? What are they? Is the guarantee just a gimmick to get your custom – not worth the paper it’s written on?
If this is the kind of deal where a solicitor is involved then you can check out these things with your solicitor. If it’s a smaller investment – i.e. it’s just you and your purse/wallet – then if the guarantee is important to you, make sure you can trust it (ask advice or get legal representation if it makes sense).
7 – Can I speak to any other Investors?
It seems silly to bring up the jar of coffee again, doesn’t it? But you do this all the time with your everyday purchases. How many times have you bought something from the supermarket based on a friend’s recommendation.
Recommendations and referrals mean a great deal. If something is in the open market, it’s a good deal and a sound product or investment then you absolutely should be able to find others you can talk to who can vouch for that and validate that yes, in fact it would be a good investment for you. Or at least provide you some extra information to help your decision.
8 – Why is this a good deal for the seller?
Business is business. If something seems like a really great deal for you, chances are it’s an even better deal for the seller. There are some exceptions in the case of ‘loss-leaders’ (e.g. to gain market share) but most of the time, the deal is good for the seller too, otherwise they may not be in business for long.
It’s really useful, and in fact really important to understand what is in it for the seller. Why is this a good deal for the seller? If it seems like a bad deal for the seller, why? You need to understand this. It will reassure you, provide more background and help you answer some of the questions above.
By the way – as long as it’s a good deal for you you should have no problem paying the seller what they’re worth.
By the way II – don’t be afraid to ask for full disclosure of what the seller gets from the deal and once you understand the picture from both sides you could also find some wiggle room and do a little negotiation (just don’t negotiate yourself out of the deal completely).
9 – Who else can I get to validate my decision?
This final question is really important if you are making a large investment. It includes other investors per point 7, but also other experts.
There are experts all over the place who can help and advise you for free. People you know but also strangers – more accessible than ever before via a google search, social media and online forums.
Get a second and third opinion on your investment. Explore conflicting information until you get a consistent answer to any queries you have regarding the investment.
There are plenty of other questions you could (and should) ask (i.e. the more questions you ask the better) but for me these are the 9 most important.