Over the past few days, we have been hearing people losing money in some chit funds of a famous jewelry chain, or deposits in a builder who was offering a high rate of interest. This has happened from time immemorial and will continue as long as we do not understand the fundamental tenets of investing.
1. GREED: The single most important factor leading people to make some of these unscrupulous deposits is the GREED that is associated with earning a higher rate of INTEREST. Especially in unregulated entities. These high interest rates become unsustainable in the long term and tend to develop into a PONZI scheme, where fresh money is used to retire old maturities thereby further spiralling the loop. So if the interest rate of your investment is significantly higher than what is prevailing in the marketplace understand that you are TAKING A HIGH RISK and that your PRINCIPAL CUM RETURNS are UNCERTAIN.
2. EMOTIONS: Sometimes we mix investing with emotions i.e. make some judgements on the character of the owner/ promoter if he is good or bad. Everybody is GOOD when he is LIQUID and BAD when he is OUT OF CASH. So look at the underlying business prospects and growth to take your judgement call.
3. ASSURANCE / GUARANTEE: These have no meaning unless told by a sovereign or government, so when a corporate or individual says these words it shows his intent but not his ability, so do not confuse the two. There may be intent to pay but if the ability is compromised, there is no LIQUIDITY to REPAY the DEPOSITS.
4. TOO GOOD TO BE TRUE (TGTBT): Our gut constantly is tuned to telling us that the returns are too good to be true. Either the investment has HIGH RISKS that may impact it down the line or that these rates are unsustainable in the long run. So the next time when your mind thinks TGTBT, take some time to re-evaluate the investment for risks.
5. FILL IT, SHUT IT, FORGET IT: This is the caption for a motorcycle advertisement not so long ago, however in the investment world we are subject to rapid changes in the economic and global geopolitical factors. This constant change is a given and one needs to watch out for how some of these changes may impact our investments. One cannot just make investments and hope that it does well. HOPE IS NOT A STRATEGY.
As the legendary Warren Buffett says;
RULE # 1: NEVER LOSE MONEY
RULE # 2: NEVER FORGET RULE #1