cft

Where not to invest?

I always like to go back to basics before investing and keep the following advice from Warren Buffett in mind: “Never invest in a business you can’t understand”. Be careful with where and how you invest!


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3 years ago | 2 min read

While many of us love investing and growing our money (nothing wrong with that), it is important to be careful in where you put your hard-earned money.

Money growth is such an interesting topic in almost everyone’s life that there are individuals / organizations who promise false growth (or present the returns with sugarcoated marketing gimmicks) and especially target those who are new to the financial investment world.

Now, probably the question on your mind is: What kind of investment to avoid? Below are a couple of examples:

1) Sugarcoated returns: Assume you are 30 years old currently. What would you say to an advisor from a financial institution coming to you with the following offer: You give them $1000 every year for the next 10 years.

At the time of your retirement (say 60 years), they will double the original capital and give you $20,000 (compared to your total deposit of $10,000 over the 10 years). Sounds like a sweet deal, right? Wrong!

Let’s see what happens if you invested the same money in an index fund offering 8% return per year

You can get over $67,000 with a low risk index fund investing vs. the offered value of $20,000. Your advisor is effectively offering you much less annual return, but you will not be able to comprehend that if you don’t do the underlying math.

2) Ponzi / Pyramid schemes: If someone comes to you with an offer that they are going to “guarantee” you returns which are higher than the normal market returns (say more than 8–10% in most cases), then be careful.

In some cases, those people who offer such high returns play with the rotation of money and will promise the same high-return story to others like you. This is a typical pyramid approach (also called Ponzi scheme), where there is no real underlying investment made and the deposits from one investor and used to return money to the other investor who wants to withdraw.

The success of such business depends on getting more and more people to deposit. As soon as a high proportion of people start withdrawing, the whole business model collapses and those who withdraw at the end of the chain stand to loose.

Anytime someone comes to you with an offer of excessively high return, always ask them the underlying business model and how they are able to offer such high returns. You will often see those people either not being able to give you the answer or answering in a way that you can’t understand.

I always like to go back to basics before investing and keep the following advice from Warren Buffett in mind: “Never invest in a business you can’t understand”. Be careful with where and how you invest!

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I am a business person with strong consulting, sales and operations background, and high affection for technology. I also provide advice / consulting to small / startup companies on request.


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