It’s a reasonably regular occurrence for our clients to be offered the chance to participate in “fantastic”, once-off, investment opportunities, that offer large potential upside, by people they know and trust. And most of these people are genuine in their belief that they are doing our clients a favour.
When we are asked to examine these investment proposals, that are often designed to fund products or services at the very early stage of their stgelopment, we usually agree with our clients that they have some apparent merit. The ideas or concepts often look good and, sometimes, great.
But both our experience and the robust evidence suggest that regardless of how wonderful they appear, such “thrill investments” rarely pay-off. This is probably a good thing as our penchant to confuse luck with skill can lead those who have initial success to direct increasing amounts of their hard earned wealth to these high risk “opportunities”.
However, they are often hard to resist. The potential emotional rewards of being associated with the “next big thing” may have as great an attraction as the potential financial rewards.
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Thrill investments have a high failure rate
The big problem with most thrill investments is that it is such a long way from a “good idea” to commercialisation. You can be highly confident that no matter what the idea is there are other directly competing or close alternative proposals already on the drawing board. And, even if there isn’t, once you as an potential investor become aware of the good idea, there soon will be.
Having the best technology, product or service doesn’t guarantee success. All sorts of unpredictable factors and a large amount of luck will determine which of the host of really good concepts emerge as the rare successes that the financial media would often have you believe was the obvious result from the beginning.
The reality is that the vast majority of thrill investments fail. And, generally, you don’t just lose some of your investment – you lose it all. They can be much more risky than purchasing an individual listed share. Usually, a particular company has to have some track record to obtain the listing in the first place. And, by comparison, the total share market looks extremely conservative.
But, I must confess, even I have succumbed to the lure of a “thrill investment”. My experience provides anecdotal support for the views expressed in this article.
About 10 years ago, at the insistent invitation of my then brother-in-law, I made a minimum investment of $25,000 in a radical new bumper bar coating technology that promised to save the automobile industry millions of dollars. My $25,000 and funds from other investors were dissipated within about 12 months on further research into the product and marketing to the car manufacturers.
As is often the case, further funds were sought from investors on the assurance that fabulous success was only a few million dollars more away. Fortunately, I had mentally written-off the first $25,000 and stuck to an initial decision that I wouldn’t, under any circumstances, commit further funds to what both my knowledge and experience told me was most likely “throwing good money after bad”. Those investors who chose to do so also lost all their additional investment.
Thrill investments more like purchasing a lottery ticket
Despite the very poor odds, and the lack of evidence for the ability of investment professionals to reliably pick “thrill investments” that turn out to be winners, we suggest a number of guidelines for those who are tempted, for whatever reason, to take such gambles with their hard-earned investment wealth. These include:
– You should plan for losing all your funds – a thrill investment is much like purchasing a lottery ticket, with your only return the dreaming you do as to how you might spend the unlikely winnings;
– If your financial objectives would be jeopardised by the thrill investment failing, you can’t afford it and shouldn’t invest;
– You should allocate no more than a pre-determined amount of your investment wealth to thrill investments and manage those holdings strategically e.g.
– A number of smaller holdings, rather than one or a few large holdings;
– If you are at your “thrill investment” allocation limit and wish to make a new investment, you should only do so if you reduce your holding in an existing investment;
– You need to understand whether there are any contingent risks associated with the investment that leave you open to losing more than your original investment e.g. an investment in a business that has entered into a long term property lease that remains in place despite the failure of the business.
If your aim is to protect and grow your investment wealth over time, you should always be trying to bias the odds in your favour. A decision to make a thrill investment is inconsistent with this aim. We would encourage you to at least make sure you limit the potential damage.
Wealth Foundations (ABN 95 965 896 114) is a corporate authorised representative of Wealth Leadership Services Pty Ltd (Corporate Authorised Representative No. 319641). Wealth Leadership Services Pty Limited (ABN 36 121 535 993) is a licensed Australian financial services firm (AFS Licence No. 317369).
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