What Were You Thinking?

I see a number of unfortunate clients who have loaned or invested money with people in risky business ventures and have lost their money.  When they come to see me, my first thought is "What were you thinking?"  Some of these clients, most of whom are not terribly wealthy, have invested well over $100,000 in clubs, restaurants or other risky businesses.

Some of the time, we are lucky and manage to recover some or all of our client's investment.  Most of the time, however, the client takes a significant loss and some never recover a thing.

In these days of crazy stock markets and people making a fortune by owning the right stock and selling at the right time, people seem to be even more anxious to find that "perfect" investment.

Somebody comes to you and tells you great things about this fantastic new business they will be operating.  They might even show you brochures and fancy looking financial projections.  Somehow, when this occurs, people turn off their normal thought processes and fail to appreciate the risk that they are taking.

You probably wouldn't invest $2,000 in a stock without investigating the company or at least getting an opinion from your stockbroker. So make sure that you get an independent opinion about the viability of this investment before you sign the dotted line and hand over a large cheque.

The fact that the person looking for your money promises you some fantastic rate of interest should not get you excited: it should worry you.  The only reason that someone is coming to borrow from you is because they can't borrow from the bank.  The bank is a cheap place to borrow money. Banks are in the business of lending money. They give lots of loans, knowing that not all of them will be good.  They expect certain loans to default.  However, the bank has decided that they won't loan this individual any more money.  If the bank considers this loan to be too risky, you should be concerned. Unless you are in the business of lending money and you make enough loans so that the profit on the good loans will offset any losses on the bad ones, you should think very hard about investing in this manner.

Another common problem with these cases is that there is little or no paperwork to go along with the loan.  If someone offers you a 10% share in the company, you need to make sure that you get a share certificate along with all the other paperwork at the same time as you advance the funds.  You should also investigate the corporate books to ensure that the company cannot issue more shares to someone else and thereby make your 10 percent stake a lot smaller.

If someone says that they will personally guarantee your investment, you need to have proper documentation so that you can enforce that guarantee in the case that your investment goes south.  This is a complicated area of law, and the proper documents are essential.

Another bad omen is when the person is desperate for your cheque and appear that they need the money immediately. The bottom line: private investments should be investigated thoroughly and properly documented.  If you don't take the necessary steps to protect your investment, you should not be surprised if the investment turns out to be a loser.