Investor Security - Part 1
Sometimes the greatest benefits can also pose the greatest challenges. In a Checkbook IRA, investors have the freedom to pursue the assets that make sense to them. With that freedom, though, comes an increased responsibility to do research. Investors have to look carefully at the proposed investment and see if it truly has the potential to be profitable in the long term. Here are a few common red flags that can signal an investor that it’s time to start looking somewhere else.
- Lack Of Numbers – There is a hard balance to negotiate when investing in a newer company. On one hand you want to get in on the ground floor where the profit potential is amazing. On the other, you want to make sure that the company is legitimate and that they are already on their way to success. When a company first starts off, obviously there will be no numbers yet. However, as the company starts rolling, investors should be able to observe a quantifiable increase in the relevant metrics. If you’re looking at a company that is already two years in, and yet you’re still getting the same “we will be great” storytelling, then you may want to look elsewhere. If it’s still too soon to tell, investors should still be circumspect with their retirement funds. Very new companies may be better investing candidates for risk capital.
- The Wrong Kind Of Numbers – Sometimes a company does have a spreadsheet full of numbers that they can share with potential investors. That sheet can show increasing partnerships, growing investments, and even progress in moving product. However, don’t just look at the bottom line and send them a check. Sometimes the appearance the numbers may give off trends in one direction, while a detailed examination may trend in the other. Look at the nature of the investments and capital raises. Are there any trades of services for cash? Are there any discrepancies in their fund-raising patterns? Do the growth numbers indicate true clients or are they being placed in that column from other sources? Not everybody has the skillset to take a dive into the numbers, but that’s what friends and accountants are for.
- Press Releases – Press releases can serve two different functions for a company. The first is to inform the public at large of new products or partnerships and act as a form of marketing. The second is to serve as a way to reach potential investors and put forth the data that makes this company an investment worthy target. Not every company puts out press releases and that’s okay. However, for those who do, it’s important to take a look and see what they are trumpeting. Are they providing real growth numbers or are they recycling the idea of the company with little apparent progress?
If you ever have questions, don’t be embarrassed to ask a financial professional. Putting in effort before investing can often pay tremendous dividends afterwards.