Stop Making Investments That You Regret Later. Learn About the Red Flags of Bad Investments.
Hello Aluxers and welcome back to an exciting Sunday Motivational article since today we will take a look at 15 signs that you’re about to make a bad investment.
Most of you are excited to become an investor – as you should – but there are a couple of things that helped us save hundreds of hours and hundreds of thousands of dollars along the way.
By the end of this article you will have a clear understanding of the types of triggers you should pay attention to when deciding to make an investment.
As always, here is the video version of this article:
WeWith that said, here are 14 Red Flags you should pay attention to if you don’t want to make a bad investment.
The Numbers Don’t Work
Outside of your feelings there’s the brutal reality. It doesn’t matter how much your sister in law believes in her bejeweled banana business, if she was unable to sell any to strangers up to this point and it costs more to produce one than she charges for them, you best do the right thing and walk away.
NUMBERS are the foundation of the language of money!
If you don’t speak numbers, you’ll never be rich and you’ll always lose money.
Make sure the numbers make sense as an investment and that also your partners are able to easily communicate and understand numbers.
You Don’t Understand What You’re Investing In
We’ve seen this way too often so we needed to address it early in the article.
As a golden rule of investment:
Only invest in things you understand!
It doesn’t matter that your friend’s cousin is making bank running a meta-node for an ALT coin you’ve never heard of, or that NFTs are being resold for a ton of profit right now..
If you have no idea what any of those words mean or know how to do any of it yourself, it’s best to stay away.
You can always begin to educate yourself on things that spark your interest, but never put your money in things that are outside of your realm of understanding.
If you’re looking to make some smart investments, check out 15 BEST INVESTMENTS of 2020-2021.
You Don’t Know the Person You’re Investing In
How many times do we need to say this:
Do not give your money to people you don’t know, unless you’re comfortable with never getting the money back!
Character-Fit is usually more important than everything else. We’ve seen start-ups reinvent themselves through multiple pivots and finally winning because the founders were such a great match.
Sometimes it’s not about the idea but the person. For a good entrepreneur is just a matter of time until they hit it out of the park. The opposite is true as well, so make sure you get to know the person you’re investing with or in.
The Other Party Has No Skin in the Game
This is one of those situations that are an immediate red flag for almost any educated investor.
People approach us consistently with their “million dollar ideas” that they need our money to bring to market.
We’ve said it once and we’ll say it again:
An idea is worth 1 million dollars, only after it has made 1 million dollars!
Ideas are cheap or even free. The fact that you didn’t make any progress on your own and need the money to make it happen signals that you are not the right person to implement that idea.
If They can’t do it without you, it’s not them who’ll be running the ship, it’s you!
Always make sure the other party is putting at risk at least as much as you are when you decide to back them. It’s not about the amount of money to match, but about what it is at stake if the project fails.
All Buzz, No Substance
Any serious investor will be able to read beyond the words.
Everywhere you look there’s someone building a crypto-decentralized-AI in Bio-Tech that’s Renewable and Sustainable with 0 carbon footprint sourced locally.
All that mumbo-jumbo means you didn’t really do much work and you’re out there fishing.
If you take away the buzzwords, what are you left with?
We’ve seen this in the 2000s when we had the dot com boom. Every company that was on the internet was getting 10 to 100X the valuation it deserved from a business perspective.
We’re seeing this replay not with many crypto projects.
Many of the .com companies went away, until they were eventually replaced by business sound companies.
The buzz signals the direction the world is headed towards, but not everyone will end up on the ship!
Your job as an investor is to pay close attention to those who hide behind buzzwords and figure out if there’s actual meat on the bone, otherwise you’ll all starve on your dime.
One of the best more recent case-studies on this type of behavior you’ll find the in book: Bad Blood: Secrets and Lies in a Silicon Valley Startup. It’s a fascinating read in the tech space where a company called Theranos, through the power of – some tech – but more bullshit got itself to a 9 billion dollar valuation.
If you’re in the tech-space or business in general we recommend the read. Here’s a link for the book, or if you go to alux.com/freebook right now and sign up you can get BAD BLOOD as an audiobook for free, thanks to our friends at Audible.
“Risk-Free” & “Guaranteed Returns” Investment Opportunities
If there’s something we learned in life is that:
Nothing is guaranteed!
And, wherever there’s something to be gained there’s always risk associated with it.
People who say otherwise have no idea what they’re talking about.
We’ve learned to stay away from everything that overpromisses on the risk to reward front, it just works better for us.. “If it’s so risk free, why don’t you take a mortgage on your home and invest in it yourself?!”
The only guarantee you have is that in a long enough time frame, something will go terribly wrong and you’ll be impacted by it.
There’s always a price to pay, sometimes it’s actual money, other times you pay in time, effort, stress or with your peace of mind.
Less Educated People Are Talking About It and Investing in It
This is a contrarian rule we’ve learned from a prolific investor in the stock market.
When people who are not connected to the industry begin talking about how good of an investment something is, it’s an alarm it might be time to take your profit and pull out.
Why is this important for investors: smart money is always ahead of the curve.
Smart money bought Tesla stock when it was around 10 to $20 per share. Even smarter money got in pre-IPO.
Now, at around 7 to $800 per share the average person is looking at Tesla as a great investment – and it might be, we see no reason why Tesla couldn’t go to $2000 per share – but if everything goes right, it’s a 3X investment on your end, while smart money who came in at 20 bucks is already at a 40X return.
Ripple is another great example! The average consumer got super excited about ripple when it was around $2 per coin. That’s when everybody started jumping in and watched the price skyrocket 50% to $3 in just a couple of days before collapsing.
Here’s what to remember:
If you need the investment to go right in order to put food on the table, you’re not ready to be an investor!
You Need to Borrow Money to Get In
If you don’t have the money, you’re not in a position to invest. If you do, you’re playing a very dangerous game.
Playing with debt in the early stage of your investment career could have long term effects.
Even later on in your investment career when you will use good debt to grow your fortune, if you’re not sitting on enough money to buy it yourself, don’t go to the banks to borrow it. Rich people are always hedging their bets and have a financial safety net in case anything goes south.
Do it yourself, start small, reinvest everything until you can finally afford it. You’ll eventually learn that this is the best long term strategy.
The Team Is Replace-Able
A big red flag is the lack of a competitive advantage. Whenever you invest any of your money think about what makes your investment stand out compared to everything else in the market.
How are you better than everyone else?
The truth is, this competitive advantage comes from the people who are running the organization. You need to be able to pin-point where the added value is coming from. These are the people who can not be replaced, because without them this entire house of cards falls apart.
The best investments you can make are in the people that can move the needle forward. If your team doesn’t have any, keep your money close or you won’t see them again.
You Can’t Change the End Result Yourself
Personally, we hate being DUMB money in any sort of deal. If you’re a great investor, you can always brings something to the table outside of money.
Every single active investment we’ve made followed this rule and it worked great. This is especially true if you’re young and early in the game, when you don’t have enough money to afford the luxury of being passive.
You have a bright intellect, you understand the people who are just like you, so leverage this as a competitive advantage and give your investment a slight edge to succeed.
This applies multiple forms of investment, from tech to real estate. Mold the end product after what you would need and the world would follow.
When we were starting out, learning valuable skills was highly expensive. We spent thousands of dollars on conferences and events and still didn’t feel like we got what we needed.
After we found our own success, we built ALUX to serve as the resource we didn’t have growing up and give you guys the answers we found the hard-way through trial and error. The best thing is you all found it valuable enough and subscribed to our channel and joined us in the journey. We’re grateful for that!
If you’re reading this and not subscribed to the channel, we would definitely appreciate it as a way of saying thank you! We’re not gonna get emotional, so let’s get back to the signs you’re about to make a dumb investment!
Sounds Too Good to Be True
This is a tale as old as time.
If it sounds too good to be true, it probably is!
You’re not gonna make 3450 dollar per week from the comfort of your home – no matter how many investors hate the guru that’s sharing this secret with you, in the same way your manhood won’t grow 2 inches per month if you do “this strange exercise” 3 times a day.
People fall into the trap of QUICK results, because they are scared and desperate; and when you are in this state you are vulnerable against people who package whatever they’re selling as your way out.
There are no get rich quick schemes, there are only people who are getting rich off of you!
If it sounds too good to be true, it probably is!
Playing Short Term Games
This builds on top of the previous point.
Things of value are built to last, they take a long long time to get strong, similar to a tree that needs to grow its roots if it wants to withstand the storms ahead and we all know storms are brewing in the horizon.
Always be wary of those focused on the momentary tactics and not the long term fundamentals.
Always be wary of those who do not choose to look in the distance, but look in front of their feet.
Any experienced investor can spot very quickly when someone doesn’t think long term.
If you want to be successful in life, play long term games with people who are in it for the long run!
Not Understanding and Paying Attention to the Marketplace
A major red flag is when you realise people are not paying attention to what’s happening outside. As it happens With most start-ups, the passion of building overtakes the market research and while you’re locked in the garage developing the next flight deals app, outside a pandemic is happening halting all air travel.
Here’s the thing: those who bet on the latest technology and have the know-how to leverage it quickly, win at the market game.
In the world of media giants like youtube, facebook, netflix or apple, Spotify is crushing it by being focused on what’s happening in the market and making moves accordingly.
Many billions of dollars were lost because people did not pay attention to the marketplace.
Lack of Paperwork
Here’s something you should remember for as long as you live: If it isn’t on paper or on the blockchain, it isn’t true!
Always put it in writing, either legally or technologically. We know how boring paperwork can be, how going through contracts isn’t as exciting as building, but when it comes to money, especially where there’s the potential of big money, the rules should be chipped in stone.
We don’t care how much you trust the person, how firm their handshake was, or how long you go way back.. The moment the money printer goes BRRRRRrrrrrrr…. People change.
Make sure you’re protected.
Unable to Easily Liquidate
An important element of any investment is having an end goal.. A way out.
A common red flag is an inability to liquidate easily. The quicker you are able to liquidate, the smoother the access to capital you have in case something happens.
Not every investment is made to be liquidated quickly, as we mentioned you should always focus on playing long term games, but there needs to be a way to get your money out if you want to.
If the option is not on the table, that’s a sign you might be headed towards a bad deal, it’s up to you to structure it in such a way that you’re protected.
When we invest in technology start-ups, we limit the amount we use to purchase equity to a smaller amount, but offer additional capital as a zero interest debt, which gets the team the money they need, we get the amount of shares we want, with less of a at-risk investment, for debt can always be called upon if things go south.
We know there are plenty of investors in our community, which is why we’re want to bring you into this: What is a major red flag for you when looking at an investment? Let us know in the comments! We’ll be browsing around, maybe even learn a thing or two.