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As you know, I don’t write about my victories only.
I also write about my failures. My very big, shameful failures.
Why? To give you hope that you’re not alone in doing foolish things with your finances.
Here’s my confession: For several years, different groups of friends invited me to invest in their small businesses. In total, I invested millions in four small businesses owned by my friends. I had no control over their businesses. I didn’t interfere or investigate. I just gave them money.
By nature, I trust people’s character and competence. That has blessed me many times. But it also has hurt me many times.
What happened to those businesses? Sadly, all four of those businesses are under water today. Sinking with these businesses is my hard-earned money.
Hey, I’m to blame. I lent them money without looking keenly into the details of their business. I didn’t have time. I didn’t bother. And I took the easy path of just giving them my money and not checking regularly how the business was operating.
But losing my money isn’t what makes me sad. I can earn the money I lost. I’m really sad for my friends who owned these businesses—and the other investors like me who put their money in those businesses. Some of these fellow-investors are also friends of mine. (I know one person who invested his retirement money.)
Reflecting on my painful experience, I want to share with you 7 ‘Don’ts’ that you need to follow so you won’t lose your money…
1. Don’t Invest Just Because They’re Good Friends
All my failed investments were not with strangers, but with friends I trusted.
In other words, I invested my hard-earned money with them because they were good people. They were kind, respectful, prayerful, helpful, loving...
My painful lesson? Having a good heart is NOT enough for a good business. You need a unique kind of wisdom.
But not just any kind of wisdom…
2. Don’t Invest Just Because They’re Professionals
My friends were brilliant doctors, brilliant engineers, brilliant administrators… but they were not brilliant entrepreneurs.
There’s a BIG difference.
A great chef can cook a great meal but run a bankrupt restaurant. A great architect can design a great house but run a bankrupt architectural firm.
A great preacher can preach a great message but run a bankrupt church. A great doctor can perform great surgery but run a bankrupt clinic.
You need entrepreneurial wisdom.
And you don’t get that just because you have a business idea…
3. Don’t Invest Just Because They Say It’s a Fantastic Business
My friends told me, “we’re building a very profitable business because it’s very unique. No one is doing it yet. We’ll be the first and we’ll be earning millions! We just need extra capital so we can expand. This is a sure thing!”
I was seduced by the sizzling business idea that it was a “sure thing.” But today, I realize that great business ideas are a dime a dozen. Every Tom, Dick, and Harry has a great business idea that will make them millions.
But my mentor always asks, “What’s the execution risk?”
Unless it’s executed properly, the best ideas flop.
Don’t invest in businesses that haven’t proven themselves yet. If you do invest, then you should invest an amount that you’re willing to lose.
4. Don’t Invest Just Because Their Business Is Expanding
I used to get impressed when an entrepreneur says, “I’m building my 8th branch!” or “We’re now building our Mindanao operations.”
I don’t get impressed by that anymore.
I saw a business that grew to 34 stores in its 5th year—but only to collapse on its 6th year. The entire business vanished from the face of the earth.
Expansion can be an illusion. A smoke screen. A cover-up. The business owner (sometimes unconsciously) wants to hide the fact that his business is losing money—and by expanding—he hopes to earn his money back.
At the end of the day, it’s their FINANCIAL NUMBERS that will tell you the real health of their business. In other words, their financial statements.
In one of these “expanding” businesses where I invested money, I was able to get a copy of their financial statement. I handed it over to my Financial Mentor to read it. After looking at it for just 15 seconds, he said, “It’s not a good businesses. Don’t invest in it.”
But it was too late. I already did. This happened almost seven years ago—when I was still really foolish. (I’m just a little less foolish now!)
5. Don’t Invest Just Because of High Interest Rates
In fact, be wary if they offer you high interest rates.
The very first time my friends offered me to invest in their business, they said, “We’ll give you two percent a month.”
“Wow,” I said to myself, “Banks only give one percent a year. But they can give two percent a month. Jackpot!”
That’s why I don’t blame them for losing my money.
I can only blame myself.
I was foolish and greedy. I’m wiser now. I realize that very few businesses on planet earth can survive giving two percent a month.
6. Don’t Invest Just Because They Give Post-Dated Checks
Post-dated checks (PDCs) are very attractive to the investor.
Because it’s something physical in your hand. With lots of nice numbers written on it.
At the start, my friends agreed to give me six post-dated checks for the next six months. Plus a contract to sign. Cool, I said. After six months, they renewed the contract by giving me six more checks.
But later on, when the checks began to bounce, what do I do with those PDCs? Go to court? For crying out loud, they’re my friends. And I don’t like going to court (waste of time, energy, attention, and money). Plus the fact that getting back my money is almost impossible anyway. (They’re bankrupt.)
7. Don’t Invest MORE Just Because the First Checks Were Good
For the first few months, even years, the checks will be good.
And good checks lull you. Because real money is pouring into your pocket. By doing this, they make you think that their business is doing very well.
I later learned that my friends were already borrowing money to pay for the older investors. This was not their intention. But the pressure to pay old investors (and the fear of litigation) forced them to do this. But this act—of getting new debts to pay old debts—is very similar to a Ponzi scheme. (You should pay old debts with business profits, not with new debts.)
The entire thing collapses when there aren’t any new investors anymore.
I invested in four businesses owned by four of my friends. In business #1, the checks were good for five months—and then the checks bounced. In business #2, the checks were good for 12 months—and then the checks bounced. In business #3 and #4, the checks were good for 24 months and more—and then the checks bounced too. Obviously, I placed more money in Business #3 and #4 because I kept investing whenever they needed more money. I was lulled into thinking the business was doing well—when in fact, the entire thing was built on a shaky foundation.
Again, I’m to blame. I was foolish. I know better. (It takes pain to make you wiser.)
Resolution: I’ve Simplified My Investments
I no longer invest in other people’s businesses.
Today, I’ve decided to keep my investing very simple. I invest in two things only:
First, I invest in my personal businesses, where I’m in CONTROL of the money and the business. (If I fail and lose, that’s my money I lose. No problem.)
Second, I invest in the stock market. I buy giant companies of the Philippines.
Even if I’m not in control, it’s okay, because those who are in control are financial wizards like Henry Sy, John Gokongwei, and Jaime Zobel. When you invest in the best companies in the stock market, you partner with industry titans.
Because of these two simple decisions, my money has multiplied over the years.
Keep investing simple.
And your money will multiply as well.
I repeat Rule #1 of Becoming Rich: If you earn it, don’t lose it.
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