Have you ever seen that investment that seems too good to be true on the surface? Only to find out after a little digging that there are a lot of flaws in the investment and everything has to go perfectly for it to perform?
The Baseball Team That Needs Everyone to Have a Career Year
I equate the too good to be true investments with a sports team that needs many of their players to have a career year. Let’s use a major league baseball team as an example.
Could a team full of historically .230 hitters who average 15 home runs a year have six or seven players hit .270 with 25 home runs? And have one or two players from that group blow it out of the water and hit 35 home runs? Sure it could happen, but it’s not likely.
This team projected to win 75 games could shock everyone and win 105 games but it’s a very slim chance. Teams like this only come around once every few years in pro sports and franchises can go decades without it happening to their team.
I look at investing in a very similar way.
When It Happens With Investing
Here are a few examples of when it happens with investing. Let’s take three investments: real estate, stocks, and angel investments.
Related: Risk and Money: 10 Principles
Real Estate
Tommy found out about a deal from a friend of a friend who is raising money for a 60 unit tiny home community with all the units as short term rentals.
Equity growth and cashflow are supposed to be out of this world as the tiny homes are inexpensive to build and the land was purchased below market. The model is to charge less than other options in the area while offering a unique experience.
The person in charge of renting out and managing the units is inexperienced but the deal seems so good that it won’t matter if a few mistakes are made. The buy in for the deal is $100,000 and there’s supposed to be a 24 percent return in the first year.
The development is in the outskirts of town and there are a few large, established resorts within three square miles. Return estimates are based on 70 percent occupancy the first year.
Now, this deal could work out beautifully if everything goes perfectly right. It could also go very poorly.
What if the resorts lower their prices? Or the new operator becomes overwhelmed and runs things into the ground? Or the homes take longer than anticipated to build?
Could the city push back on the development and make them jump through hoops to get the permitting done?
A lot of things need to go right to get these extraordinarily high returns.
Stocks
There’s a newer company that just went public. They are supposed to be a major interrupter in the tech space. You’ve got a chance to invest early.
The founders of the company are touting it as the next Amazon or Uber. The company is unproven but a buddy of yours thinks it could really explode. This seems like the type of company you can invest a couple thousand into and get returns into the hundreds of thousands or millions.
It seems like an investment too good to be true. Minimal risk and a massive upside. This company could explode but it could also go to zero, or close to it.
When I hear about deals like this I have to remember there are thousands of hedge fund managers that know a lot more than me who haven’t invested in this “opportunity.” There’s also AI with advanced data that the big funds are using.
Do I know, or does my buddy know more than them? Maybe, but a whole lot has to go right.
Angel Investments
An opportunity to own part of a company that hasn’t gone public yet? Imagine the payday if someone bought into Google, Amazon, Uber, or Tesla before they went public!
A $50,000 investment could turn into millions or billions. While the potential returns are phenomenal, you have to ask yourself, what are the chances?
Not to be negative, but most companies are not going to become the next Tesla or Amazon. More than likely a $50,000 investment is going to have small returns or lose money.
If it sounds too good to be true, you also have to ask the question of why me? Why are you being asked to invest instead of them going to a big fund with more connections? Unless you are that big fund, this is cause for reasonable suspicion.
Conclusion: There is Opportunity But Beware
I don’t want to sound overly pessimistic because there is opportunity out there. A lot of opportunity. Especially for those who have done the due diligence and have good connections.
It’s just that the too good to be true opportunities are usually just that: too good to be true. So if an investment feels like playing the lottery, beware.
Have you ever been involved in an investment that seemed too good to be true?
