I see people around me make dumb decisions about their money when it comes to investing. What appears to be “get rich if you do X schemes”, “multi-level marketing opportunities” and “sold investment opportunities” have cost people their retirement savings and bad debts.
There are too many fraud/scam attempts for people who can’t temper their greed and therefore a checklist will help you to think things through.
For convenience sake, I refer all forms of Investment Opportunities/Schemes/Ideas and Business Deals as “Deal”.
- Am I making an emotional decision?
Never feel obligated to say YES just because your friends are a part of the deal. Many successful Ponzi scheme work through referrals. Seek to keep calm and collect data before attempting a decision after thinking through these set of questions over the day.
- What’s the upside and downside of the deal?
The upside is what you could potentially gain. At times when your deal upside is about what’s trending in the market, you have to ask yourself if this is truly a good deal. e.g. a 15% discount off real estate prices at the moment is normal
The downside is anything that could go wrong in the deal. Richard Branson, Virgin, finds as many downsides to the deal as possible. This could include the short term and long term implications of your other deals and your finances.
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- What are the opportunity costs at stake if I invest my money in X deal?
It’s important to think if your time and money, both finite resources, could be better spent elsewhere. Your network and net worth might restrict your access to good deals, but that doesn’t mean they don’t exist. I would always ask someone who’s smarter or more connected than I am in their opinion on the deal.
- Am I in the financial position to bear the risk for the promise of potential returns? Do I have a safety net if things fail? How can I hedge my risk better and reduce my downside?
Ensure before you invest. If you’re investing in the stock market, have a rainy day fund (6 months salary) and health insurance before you even consider investing. It’s the smart thing to do, and you wouldn’t want your quality of life to be affected when the deal goes south or if something unexpected happens.
- Have I done enough research and validated my assumptions with multiple sources including experts with experience? Do I understand what my odds are?
If someone proposes a deal to you, chances are there is already information asymmetry, which means they know something you don’t. Your job is to clarify as many doubts as your instinct could muster. Try your best to bridge the knowledge gap and don’t be afraid to ask for help.
- What are the immediate tangible benefits from investing in X scheme/deal?
Some schemes (or courses) offer intangibles such as access to information and connections for a price. While that sounds good on paper, intangibles such as the above-limited window of opportunity(s) and are futile without action. The more immediate and tangible your returns the better. If you do want to invest in an intangible, acquire meta-skills instead. e.g. critical thinking and business valuation
- What’s their angle and where do I fit in the greater scheme of things? How does X scheme/deal get people to part with their money? What’s their business/operating model? Who else is in it and why?
Are there signs of desperation? Some Red flags: “Everyone is doing it” / “It’s the next big thing” (*bullshit) / “It’s an exclusive time-sensitive opportunity for a select few” / “Your friends are making so much money from X”
If the deal sounds too good to be true, it probably is.
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Daylon Soh’s network is filled with entrepreneurs who make deals daily. He worked for an MLM company when he was 16 and learnt the art of selling and hustling. He currently works in the technology sector for an MNC and is writing a book about Opportunity Density: The Art of Building and Multiplying your Social Capital.
Feel free to connect with him on LinkedIn.
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