It’s All in the Risks
In the investment world, there are loads of risks, as there are also in our daily lives and it doesn’t mean that we can’t protect from them. In this post, we will look at some the most important ones.
When we are considering an investment, one of the first questions is what are the risks? Once those have been identified, one can start putting in place the necessary protection against those risks. It’s like when you identify a limiting belief, then you can start putting in place a declaration to replace that limiting belief. Once one is sick, the first step in getting better, is to identify the cause, to make the diagnostic. Then on, it’s simple to take the antidote and prevention medicine so the risk of happening again is reduce to the minimum.
With investments, it’s the same. There are investment risks and once these have been identified the necessary protections can be put in place. Keep in mind that when you are investing, you should invest only what you can afford to lose.
When you are considering your investments, you’re not going to invest all your capital in only one investment. You need to have some diversification not only in assets, but also in asset classes. This is an important and basic rule.
Operating history: The longer a company has been operating, the more insights and better information one can have. If it is a start-up company, there is no history. What does one have to do? You have to look at the management team. What is their history? What have they already accomplished? Are they really capable of taking the company to the next level? Can they solve the problems, overcome the challenges and so on? By looking at the operating history of the company or the past experience of the management team, one can better assess that risk. Start-up companies carry a very, very high risk.
Projections: When an investor is looking at the business that is pitching and they make their projections. They believe that this may happen if the wind is blowing from the right and there is no sand from the left. A projection is what is expected under a certain set of circumstances. When the circumstances change, and they always do, the projection will also change. Therefore, investors need to be careful about them, analyse them carefully and protect against them.
Lack of liquidity: When you invest, you want to be sure that at some point you can get your money back or, as soon as possible, when you invest in early stage companies or other type of assets. The reality is that you might not be able to get your money back for a long time. Why? Because it would be necessary to have a liquidity event providing the opportunity to sell the asset, or your share in the asset, in order to get your money back and it may be impossible to sell that asset. Investors, therefore, need to be prepared to wait for a long time and the lack of liquidity is a risk to be taken with serious consideration. Again, keep in mind to invest only what you can afford to lose. This does not mean that you’re going to lose your investment, but it may mean that you have to wait for a long time.
Dividend policy: Dividends are the share of the profits of a business distributed to the shareholders. The dividend policy are the rules for such distributions. The first step to distribute dividends is for a company to be profitable and to have enough profits that allow it to distribute them amongst shareholders. Investors need to consider that certain years companies might not have profits and consequently, there are no dividends.
Dilution: When an investor joins a company as a shareholder, he/she will have a certain percentage of the share capital, let’s say 10%, but then for whatever reason, the company needs more money and the investor doesn’t have more money to put in the business or he/she doesn’t want to put more money in the business. New shares are issued to reflect the new capital structure and when the investor before the share issuance had 10% of the business, after the issuance only have 8% or 5% or whatever percentage. There was a dilution of his/her position, even though the value of the holdings hasn’t changed. This is a very important point to take into consideration, especially if an investor wants to hold a controlling position in a company.
To conclude, keep in mind that there are risks in everything we do in life, but once they have been identified, you can live with them because you can either accept them or put the necessary protections in place to cover your downside.