I am compelled to write this blog about handling a financial loss, because recently I’ve been searching for failure stories.
We learn so much when we study failure. There is nothing like hearing what happened in an endeavor that went wrong and how the investors failed or turned it around and ended up ahead of the game.
There are three main endeavors where one could lose a chunk of cash rather quickly and they are:
1) The stock market
2) The business world
3) The real estate
In interviewing quite a few entrepreneurs I have summarized a few common denominators for failure in these endeavors:
Due Diligence: The first reason investors lose money is they look at the future numbers (the proforma) and they neglect to do the proper due diligence on the actual status of the business itself before investing. They invest based on hope and trust in the people involved when they should focus on the business model and system in place as a top priority.
Whether a stock purchase, a business purchase or a real estate acquisition, we only get into a transaction with the anticipation of future cash flows and an increase in the intrinsic value of the investment. But it is as important to have a clear exit as well.
When the expected outcome does not materialize, you could almost always trace it back to lack of knowledge in what you got yourself into. You see, the end goal of knowledge (through study and due diligence of the facts and figures) is to be able to predict more accurately and outcome of what you’ve analyzed.
A solid written agreement: The second reason investors lose money is they do not have the proper protection from the beginning to handle the down side:
In trading securities the choice of trade and the position you take using option derivatives and stocks could reduce or even eliminate any down side while keeping the upside open and unlimited.
In business the writing agreement must give you the right to step in and take the business over to recuperate your money and not be held hostage for the principals to make any more devastating decisions.
In real estate you must be able to know how to do creative financing to carry a note and resell or rent till you are able to sell at a decent price or negotiate with the bank from the beginning a non-recourse loan or if you must guarantee the loan since this is what’s most common today, you must talk to the bank early on about a loan modification instead of a foreclosure.
Decision and solution: The third reason for the loss of money in an endeavor is because once the investor realizes the endeavor has not panned out as anticipated, he/she takes too long to decide what to do next. They start relying on partners or staff opinions that are usually trying to justify what they did wrong. The sooner you detect a decline and act on it the better you will be. It critical to immediately make a list of the problems and brainstorm solutions with experts from same and different fields to decide on the best course of action. Preferably the experts should not have any gain in the outcome. But you must act fast to get the solutions implemented.
Massive Action: Fourth reason is some of these investors lose not only faith, as they get discouraged from the negative outcome, they also lose their will and the energy and to take action as needed.
The key thing to realize that time is of the essence when your investment moves against you and you begin to lose money. The longer you wait the less likely you will recover your money or the longer it will take for you to breakeven. The last thing you want is money, time and energy lost. Mind you a financial breakeven is not a breakeven because you will have a time and opportunity loss that you could never recover.
Your problems will be as small or as big as you are willing to confront them and put communication out in the direction of resolving the negative results.
Cutting your losses and moving on could be a choice to make if you realize that investing more time and effort will just make it even less likely to recover. But don’t give up so quickly.
At the end you would be so proud of yourself when you fight a downtrend and win.
What if you did everything right and still lost?
On a positive note, a loss strips us of the unessential in life. It brings us back to what’s important and valuable like positive relationships and solid principles to live by.
If you lost, make a list of the good things you have and are grateful for. It will lift your morale.
Never compromise your integrity no matter the situation or the loss. Stay true to your end goal and always believe in a better tomorrow.
Without a seed of optimism you may never recover and worst yet you may never invest again.
Rest assured, no one wins all the time. Actually it wouldn’t even be so much fun.
Happiness itself is described as a condition based on conquering obstacles on the way to achieving goals.
I wish you better due diligence, more careful written agreements, faster decisions and more solutions to be implemented with a massive degree of action and energy to turn around any declining trend and potential loss.
And if all else fails, you could at least be proud that you gave it your all and played by the rules with honesty and intelligence.
At the end of your days, you will probably realize that it is better to have tried and failed then not to have tried at all and wondered what could’ve done if only…
Invest wisely,
Cherif Medawar
Talk to management companies
