On this blog I preach a lot about investing. It is a habit everyone must inculcate and nurture as route to financial freedom. However, investing can also lead to financial ruin if you make the wrong choices. Here are examples of investment decisions that can lead to financial ruin.
Speculating with Shares
James figured it was time for him to stake his claim as smart investor. This was 2006 and the dawn of the stock market boom in Nigeria. From a starting investment of N1million in 2006, James had grown his investment to N10million by 2007. Ask James how he did it, his simple answer was “follow the money”. He didn’t know what 90% of the companies he invested in did or what their results were. He simply bought their shares by gauging their technicalities and boom it skyrocketed. James had the magic touch well, until the summer of 2008. All hell let loose and he saw his N10m diminish to N6million within a week and to N200k by the end of the year.
Whilst investing in shares is one of the most effective and time tested avenue for long term wealth creation it can also lead to financial destruction if you do not undertake proper financial analysis and understand the company that you plan to buy their shares. Buying shares in a company that has very poor fundamentals because everyone is buying and their share price is rising is like playing a lottery, only that it is worse. With a lottery you spend very little to gain a fortune but with shares you invest your hard earned money expecting a massive gain only to loose most or all of it. Apart from fundamentals, price is also a crucial part of investing in shares. Like renowned investor Charlier Munger would say, it is better to buy a fair company at a good price than a bad company at a fair price. Even if a company has good fundamentals buying it at the wrong price can be as bad as buying a bad company at a cheap price.
I knew some guy who felt the need to acquire landed assets and not loose out in what was called “the new Lagos”. He invested a lot of money buying up lands from land owners and communities without bothering to confirm if the lands in question had legal title. Years later, he found himself fighting with land grabbers and people who also claimed ownership to the land. Real Estate is a great form of investing but only it is only as great as the title documents attached to it. If you do not have legal ownership to the land as represented by a certificate of occupancy then you are setting yourself up to loose all your investments
Wrong Career Choice
Wale felt the need to get into University by all means no matter the course he was offered. He ended up getting admission in Religious Studies. FIve years later he was in the labour market searching for a lucrative employment.
Many do not see this as an investment even though it probably is the most popular form of investment out there. Some people go to the University to become Lawyers, Accountants or Doctors because they have a passion for the profession. However, different professions attract different financial reward. You do not for example expect a graduate of Religious Studies to earn a six figure monthly salary upon graduation. However, on average you would expect a Doctor or Lawyer to earn that much upon graduation. This is does not in anyway diminish the value of studying religious studies however, it is important to invest in the right education that will guaranty you the remuneration you expect.
Investing in a Ponzi Scheme
Shade visited her friend Zainab early one Monday morning searching for what to do with the N2million her Uncle just gave her. Astonished to find out she had that kind of money lying idle, Zainab admonishingly asked her if she hadn’t heard of the latest investment scheme in town where people deposit as little as N1million only to be paid N200,000 every month for 4 months and then the balance N1million. Shade wasted no time investing and two months later the N800,000 was the only amount she got back from her N2million. The investment was discovered to be an HYIP.
Ponzi (Pyramids) Schemes or HYIP (High Yield Investment Programs) are one of the easiest form of making money and also one of the easiest at losing. Most times they are made known to us by friends and family members who may have made massive returns investing in them. Unfortunately, more people lose more money investing in them than they make from them. They are mostly not backed by any asset or significant investment as such people only make money from them when other contribute. The money contributed by the last to get in is shared by those who contributed before them and so on. The scheme collapses and everyone losses when there are no more contributors. NEVER INVEST IN THESE SCHEMES
Investing money in the wrong fund
Recently, a well known Discount house collapsed and innocent savers lost money. A lot of the of the victims had invested their savings with a company with a history for delivering god returns. Unfortunately, they believed so much in the Discount House they didn’t bother to diversify their portfolio and instead trusted all their savings with the House. Most of the money lost to banks and other financial service providers is from investments in Fixed deposits, certificate of deposits, mutual funds etc. Whilst these are all good investment schemes, they carry quite some downside risk that an innocent investor might not know about. Unlike FGN Bonds and Treasury Bills which are safer and guaranteed by the Government in full, Fixed income securities with Financial Service Providers is only as safe as the solvency of the provider. If the provider goes bust so goes your money. You should hence be careful and scrutinise the provider like you would if you were lending to an individual.
A retired civil servant invested his gratuity and savings in a business he thought was going to earn him a lot of money. Whilst the business was a good one, he unfortunately went in at the wrong time. He didn’t realise a cartel controlled the business and failed to grasp the immense need for good distribution network. By the time his goods arrived, the selling price had crashed 20% below his cost price. By the time he was done selling, he only managed to recover 50% of his investment.
When you invest in the wrong business, you basically have thrown your money away. Before making an investment decision in a business that you either own or don’t own, it is important to conduct proper research, feasibility study and due diligence before investing. Most people who do not end of loosing their hard earned savings.
Owing too much
Most times, people who borrow do so with a mindset of using the money for a purposeful investment. However, when you owe too much there is tendency not to save or invest. It is a vicious cycle that is hard to come out off. Your so called investment may become a burden as you end up paying back your borrowers leaving you with little of nothing . A startup in the business in the business of printing and stationery soon faced this problem after they found it hard to balance paying back a loan of N10million and reinvesting in the business at a stage where the business required more time. Soon the business closed shop.
This article originally appeared in Nairametrics on the 23rd of November, 2013