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Excellent Executive Coaching: Growing Your Business and Enhancing Your Craft.
EEC 363: The Six Biggest Mistakes in Investment, with Andrew Stotz
00:28:38
Andrew Stotz helps mid-size family businesses maximize the value of their business by getting on-time and accurate financial statements, professionalizing operations, and increasing profitability. Whether the goal is handing over the business to the...
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- [00:05]
A
We all want our investments to prosper, but how can we avoid losing money with bad investments? Let's ask Andrew Stotts, who has interviewed 800 people on their worst investments. Andrew proposes six action steps to make sure you thrive with your investments. Welcome to the excellent executive coaching podcast. I'm your host, Dr. Katrina Buris, and today we have Andrew thoughts. Okay, well, most welcome. I'm looking forward to this interview. And let's start. You have a podcast as well, if I understood correctly.
- [00:52]
B
That's correct.
- [00:53]
A
And you've interviewed 800 people on their worst investment ever. So tell us, what did you. What did you learn from that?
- [01:04]
B
Well, the first thing is I learned that people are willing to talk about their worst investment ever. You know, I wasn't sure if they were willing to. So that's the first thing I learned. I think I basically learned kind of six lessons from that. And I just keep. I keep learning, but I think that people always ask me, what's the number one thing that you learn? And I would say the number one thing is that people don't do research before they invest. They don't do their research, and therefore, they just kind of rush into something. And that. That I would say, out of the six different things that I've tried to classify that I've learned that's number one.
- [01:43]
A
So they don't do the research, do they? They rely on their advisor.
- [01:49]
B
No. I mean, keeping in mind with 800 interviews, it's more than just an investment. It may be they started a restaurant or they bought a house or they went into a relationship. Right. It could be many, many different things. So it's a little bit more. But I would say that in theory, if you're hiring an advisor, your advisor should be doing a solid amount of research. But that still doesn't mean you don't have to look at it. You still have to ask questions and do some research.
- [02:17]
A
Absolutely. So, dying to know the other five.
- [02:21]
B
Would you like me to go through them? I'm happy to just take one by one, little by little. So the first one is fail to do their research. And I always tell people, my suggestion for people how to overcome this one is just to write down your research about your investment idea. In particular, focus on the gain. I think I'm going to buy this condo in Las Vegas and I'm going to rent it out for the next five years, and then I'm going to sell it at a much higher price. Do the calculation. You know what? And. And it doesn't have to be super Complex. So I think that's my first thing. The second most common mistake is people fail to properly assess and manage risk. They get excited about the game a little bit more.
- [03:04]
A
What do they fail to assess the risk? They don't.
- [03:07]
B
I use two words there, assess. And I try to say assess versus manage assesses before you go into the investment and manages when you're in the investment. What I see is that people get. They don't think clearly about what could go wrong. They get excited about what could go right. And that's my first step is write down all your research about what could go right. You know, calculate your potential gains. But here we have a mistake that people make of not assessing risk. And a second part of that is managing risk. Now, this is more simple to explain. In the case of the stock market, imagine you bought five stocks and you saw that one started really falling. You could say, the way I'm going to manage risk is if this stock goes down to by 20%, I'm out. This is called a stop loss. Whenever I invest in individual stocks or for my clients, I always set a stop loss. And that is one way that I manage risk. Now, the way that I would say to overcome this mistake is to start to rank the risks by probability and severity and then think about, okay, now that I understand, maybe just look at the top three risks. That's okay. You know, you don't have to look at everything, but take some time to separately separate from your research on the gain. Do some separate research on the risk. Okay, maybe I couldn't find. Maybe I don't find a tenant. You know, maybe the costs are higher than I thought. Maybe the cost of marketing. This condo is very expensive. Or maybe I don't sell it at the same price. I thought, you know, and those are all examples of risks. I would tell a story here if. If you would like to hear a little story. In my own life. I have a business in Thailand that's a coffee factory. And I have it with my best friend Dale. And we were. We had an opportunity to expand to Vietnam and with a global partner that said, look, we'll give you the franchise there for Vietnam. Now this. This company didn't have a huge presence in Vietnam, but they had a start, and it was a good global brand. So we decided to look at it. And Dale went to look at it. He did six months of talking with them, went to Vietnam, did a lot of research. And then one night on a Monday night, we met at the office, and I said, all right, your job really is to make a pitch. What's the opportunity here? And he had known that, and so he got excited. He went up on the board and he showed his calculations of what the potential upside were. And I asked him some questions about that upside. And are you calculating this in there? Yeah. So he went through everything to clearly understand the upside potential. And then, Katrina, we went to dinner. We didn't talk about the risks at all. Then we met again the following Monday, and then we had our meeting about the risks, and we went through all the risks that we saw there, and we had a clear discussion about that. And in the end, we decided that we could deploy the same amount of capital in Thailand to expand and get almost the same amount of return in revenue, but a much higher level of profit, because we didn't have to learn a new language, a new culture. We didn't have to hire new people. We didn't have to now start traveling back and forth and all that. And we didn't see that in the first meeting. We got excited about the upside. So what I like to tell people is separate the research that you do on return from the research that you do on risk. And if you do that right there, you'll probably reduce your chances of having a terrible, worst investment ever in coming on my podcast.
- [06:41]
A
Okay, good, good. What are the other. What are the other.
- [06:45]
B
Number three is driven by emotion or flawed thinking. And this one gets a little bit. It's tough when you start categorizing because you realize, like, there's so many different mental models that mess us up. There's behavioral issues that we get caught up in. So I was looking at all that, but I decided just pack that all into one. And so the way, you know, people. People basically get emotional. They jump into something or they're not thinking clearly. Their thinking process is weak. And, for instance, a good example of that is if you set up a restaurant, you got five tables in the restaurant, and you think you're gonna make a huge amount of money from this restaurant, but you may not even started really thinking about the way you thought about it was wrong. You should have thought, okay, I have five tables. What's my average revenue I would get per table, per meal? Let's say it's $500. And how many times can I turn over that table? Then I'd say, okay, two times a day, I can turn that table. And then I. It's a thinking process that you want to get clear. What I also say is to solve this. Find and explore and list out opposing Views. Because if it was me and you were talking to someone like me about opening up a restaurant, let's say, Katrina, you said you found a really nice location and you thought, I want to do this restaurant. I'm pretty knowledgeable on the subject of mistakes in investing. So find someone like me or another that knows something about restaurant or whatever. Find that knowledgeable and objective person that's separate from it and listen to what they say. Talk to them about it and listen to what they say.
- [08:23]
A
So I'm going to ask you a question. Because entrepreneurs tend to see the good things in a business, and attorneys, their job is to see the things that don't work. So it's a very different mindset. So to have the balance of being enthusiastic and entrepreneurial and being stepping back, which you recommend to go through the. The risk analysis, finding that in one person is quite difficult.
- [08:52]
B
Well, you got him on the podcast, so that's good news. But I agree. But I think that if you just ask around, you know, you may just go to another city that you know someone or a friend of a friend that has a restaurant, that may be enough. You don't need an attorney necessarily to do that. You just need a knowledgeable nodule person that's objective, that's willing to give you.
- [09:14]
A
Advice, like you say, an outside perspective that is not emotionally involved. Because the third is driven by emotion. So someone not driven by emotion.
- [09:24]
B
I had a meeting with a friend of mine for dinner, and he says, I'm going to develop an app. And I said, don't do it.
- [09:30]
A
Yeah, why?
- [09:31]
B
And he's like, what? It's the best thing. Everything's tech and all that. And I said, I'm just telling you, I've had 20 people on my podcast that have lost a huge amount of money from creating an app because they realized they didn't realize how intense it is to create a great app. And so that's a example of somewhat knowledgeable. I'm not knowledgeable in app development, but I am knowledgeable in some ways about this. And on objective, of course, my friend went and did it anyways.
- [09:57]
A
Of course, when they're passionate, you know, driven by emotion.
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B
So number. Number four.
- [10:03]
A
Well, some. Sometimes what I would say a hobby becomes a passion, which is not. It's not a business. Okay, number four.
- [10:12]
B
Yeah. And I think I would just say what you're touching upon passion and the idea of talking to an optimist versus a pessimist. We need optimism. We need passion. Without the entrepreneur and without a capitalist system, we get no development. So we don't want to rely on people who are totally negative and don't have that passion. We do want to take feedback from those people, but we have to have the passion or else we don't develop this world. So, number four.
- [10:42]
A
Yes.
- [10:43]
B
This. This one can be applied in personal relationships as well as business and investing, and that is application number four is misplaced trust.
- [10:52]
A
Do you have an example of that?
- [10:54]
B
Well, it's just. I mean, the number of people that you know. A great example of that is a guy I interviewed, Ashraf. He's from Pakistan and he's a president, previous president of CFA Society there. So chartered financial analyst. Very smart guy. He's very careful with client and he's very thoughtful in his analysis. But, you know, out of the blue, someone called him and said, hey, I found out we have some property in London that's about to be developed and you can buy it now as raw land before it's developed. And it's going to basically increase in value by 10 times once we get the development going. And this is a chance to get in at the ground floor. And within about a week, he had transferred about 10,000, the equivalent, let's say $10,000 to this guy in London. And then he never saw the money again.
- [11:43]
A
Ooh. Ow.
- [11:44]
B
It was just a scam.
- [11:46]
A
Yeah, it was a scam. So he didn't even look the background of this person.
- [11:51]
B
Yeah. And that's what. What makes it so remarkable is that he was. He's definitely a. Not. He's a very cautious guy, but it just shows that people who are untrustworthy are master manipulators.
- [12:02]
A
Yes, right.
- [12:03]
B
They know how to do it in such a way that you don't even ask or, fine, ask. Ask me. What are all the risks, you know, and then they have an answer for everything. And I have another story of a guy that was trading cryptocurrency and foreign exchange, and he was pretty excited because he had found a company outside of America that he was sending his money to. And he was trading and they were giving him some tips and he was making good money. And he. He, at one point he asked, hey, I've put in 5,000 and now we're up to 25,000. I want to take my initial 5,000 out, you know, or something along those lines. And then they. They transferred him the money, and then he ended up putting in more money and more money and kept trading. But in the end, it was all fake. It was fake charts, fake, you know, buys and sells. It was all fake. And so he trusted them. And then eventually when he tried to get the full money out, they were gone.
- [13:02]
A
Right. Well, we know there's a Pazo scheme that were done by several very. I forgot his name, but there was a.
- [13:10]
B
Well, Bernie Madoff did the Ponzi scheme, right? Yep.
- [13:13]
A
He was a master art. My goodness.
- [13:15]
B
Yeah. And that's, that's the thing about misplacing trusts is that there are masters. So what's going to happen for all of us is that people are going to come into our lives and they're going to appear trustworthy, but they're not going to be. What I like to tell people is get to know the person that you're investing with. And remember, unlike some other things, you know, we can see books on the Amazon where it says the hack for such and such or the cheat for this or the way to do this. All of these shortcuts don't exist for trust. Trust is only earned through difficult situations where you can then observe a person's behavior. Trust takes a long time and there's no shortcut for it. So just keep that in mind as you're going through your daily lives that it's. There are masters at make getting people to trust them when in fact they're not actually trustworthy.
- [14:09]
A
So, okay, so missed misplaced trust. What's the fifth?
- [14:13]
B
So fifth is failed to monitor their investment. I have a friend of mine that I advised him on a sale of his business and I asked him, what do you do with your money? He says, let me show you. He opens up the bottom door drawer on his desk and he says, all my investments, I just. Whenever the letters come in of what I own, I just put it down there. He hadn't looked at his investments in maybe five years. And it's not uncommon for many, many people. Everybody's busy. So you make an investment and then you don't follow it up and then eventually it just disappears and people disappear. Stocks go down. All kinds of things can happen. If you're not monitoring your investment, it.
- [14:54]
A
Could happen in the contrary where some stock you'd forgot by just value driven. It goes up slowly but surely you're right. Instead of.
- [15:05]
B
And that. And for. For those people, you know, that's a great stroke of luck and it may be in his portfolio that something did go up. But one place I would really recommend is when you're investing in a startup business. So let's say somebody says, oh, I'm going to start an Italian restaurant and there's none around and It's a great opportunity and I want to, I want to, I want to raise money from it. And Andrew, I want some, you know, I want $10,000 from you to be one of the initial investors. Is it possible that that Italian restaurant could make a lot of cash? Yeah, definitely it's possible. Is it probable? No. Now let's just say that the person is an expert at Italian restaurant. They had one in New York and now they've come to Las Vegas and they found the right location, everything's there. And then you say, I think my risks are relatively low. I'm going to give this guy $10,000. My suggestion if you find yourself in that situation is before you give them $10,000, you say, I only have one request. And they say, what's that? And I say, I want to have a monthly one hour meeting with you by the 15th of the month and I want to use that time to review the financial performance of the prior months.
- [16:16]
A
That's right.
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B
At the beginning. You may not have, you may not have all your data together. That's fine. Just keep meeting. We'll just keep meeting and we'll get that data together. So I can understand where you're at. When a person is in a zone that they're trying to raise capital and you ask them to do something like that, they're going to say yes. But if you try to implement that after you've invested, it's hard.
- [16:37]
A
Yeah, I bet. But that's excellent advice.
- [16:40]
B
And then you're just monitoring it and you know, you don't have to blame, you know, every single month you're working with them talking, how was revenue last month? What do you think, what do you think you could do next month to get, you know, well, we're going to do this promotion and you know, whatever and you just listen, you don't have to, you know, you're only a small investor. Let's say you own 10% or 15%. But then you encourage him to get other investors together, together for that call. So that there is a, there's an accountability there that's related to the financial performance.
- [17:09]
A
Right.
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B
You know, otherwise the entrepreneur gets caught up in the business and they forget about the objective of why the investors are investing. They're not investing because they're interested in an Italian restaurant. They're investing to get a return on their money.
- [17:23]
A
Right, right, right. So what's the six?
- [17:27]
B
Okay, well, I kind of hinted at it a little bit, but number six is a catch. All. So many people lost their money this way. That it is, number six is invested in a startup company. And the number of people that have come on the show talking about how they invested, and in my case, my worst investment ever was investing in a startup of a friend of mine. It was a good idea. He was a trustworthy guy. It went well. But there was a point in time where I was like, okay, to go to the next level, we're going to need to raise 3 to 5 million dollars for marketing. And am I ready to pitch this story or not? And the answer was no. I wasn't ready to pitch this story and I didn't, I wasn't convinced that he was going to be able to. If he got that 3 million in marketing budget and other budget, could he really take it to the next level? I wasn't convinced of that and we, we ended up pulling the plug and that's. I lost all of my investment into.
- [18:17]
A
That and everything has probably lost a friend, I believe.
- [18:21]
B
Well, I'm, what I'm good about is that I never lose friends. Even when I refuse, I refuse to lose friends. I lose enemies. Yeah. And I lose bad people. But friends over what? Money? No, I'm not going to lose it. And in this case also, it's important to understand in a capitalist system, going bankrupt or failing in business is not illegal. It is illegal in some countries. Really, it is very seriously punished. I have one of my guests from Italy and he talked about the potential criminal liabilities related to bankruptcy and I don't know the intricacies there, but you know, one of the hallmarks of the US capitalist system is that, heck, you could go run a, you could run a country, you could become a president. And having failed many times in real estate as an example, what is illegal is fraud. So for those listeners that are in a situation where your business is collapsing and you have investors and you have others involved, your, your challenge is to communicate clearly what's happening. And as long as you haven't committed fraud against your shareholders or others, you can't be held liable for failure. That's, you know, you're playing a game of capitalism. That's it. People, Katrina, look at capitalism. They say, look at those capitalists at the top of society and they're billionaires. And you know, sometimes they berate them, other times they admire them. And. But that's capitalism, right? It creates that. But I would like to argue that the other side of capitalism is more important, and that is the millions and millions of entrepreneurs who start businesses that collapse every single year.
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A
They say average failed Companies within the first five years.
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B
Yeah, I mean majority of companies are failing and when they're failing they're losing everything. And that is, that is the amazing thing of capitalism is that people keep going into the game and what are they trying to do? Develop a product or service that is appealing to the market that solves a problem that the market has. And out of those 1 million businesses that close every year, 10,000 survived to become thriving businesses. And that's the brutal edge, the brutal edge of the sword of capitalism that most people who criticize capitalism never really think about. And that is the intense amount of work and dedication done by entrepreneurs who fail.
- [20:50]
A
Right. Unfortunately, the media is very much berate wealthy people in the films that they're not honest, that they're taking advantage. And maybe that will impacting the desire of people to really be entrepreneurs. And maybe we can comment on that. Is what is the relationship toward, towards money in different countries? Work in Bangkok, is the relationship to, to money different than in England or the US or other?
- [21:21]
B
Well, I think, you know, Thailand's an interesting comparison because compared to the US we can say that. I can say from my experience that money is not the main motivator at work for Thai people. If, if it's just about a bonus or some kind of compensation, that's not enough to motivate them. Whereas I think in America you can definitely motivate people by a carrot of a big bonus, you know, for such and such. But for Thai people, what, what they workplace is harmony and a place where they have friends and they enjoy what they're doing. So definitely, you know, every place is different. But I think there's. I left The United States 32 years ago almost and there has been a rising capitalist power outside of America. While America, I believe has completely declined in its capitalism and its perception of capitalism and that's China. And though China has a political system of communism, it has an economic system. The success of their economic system has been based upon the principles of capitalism. In a sense, America won. The capitalist model won. As Deng Xiaoping said when he took over as prime minister or the head in China, he basically said, to get rich is glorious. And ultimately they unleashed the power of capitalism. And unfortunately America is completely lost now in the area of capitalism. There's still a lot of great people there, but there's not many people standing up for capitalism.
- [22:47]
A
So give us examples that you find.
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B
In the U.S. so it's the, the reg. The regulatory burden in the US is massive. So there's many countries around the world that don't have as much regulation even. I saw someone do a research report comparing Indonesia regulatory burden and the US and it was off the charts the amount of regulatory compliance. Second thing is now America has, you know, if you go to China, one of the downfalls of China is that on many of the companies they have a representative of the Communist Party, and that representative of the Communist party is making sure that that company is complying with the wishes of the Communist Party and you could say the values of the Communist Party. And now America has got that same person, it's called dei, and the DEI or ESG person that is now being more and more required to be involved in the running of the business. An exact, almost identical situation as what China's done is that there is kind of a moral aspect or a righteousness what this company should be doing and that is going to be communicated through that person. That's just been an interesting thing to watch happen in America. And ultimately that's not the way capitalism works, right? Capitalism works by trying to get together the best people with the best ideas to provide the best service and the best product to the customer. And the best wins in capitalism. A second, another downfall of the US Capitalism is, you know, people don't like the corruption of big businesses. There's collusion between the government and businesses. And government agencies seem to be captured by businesses in many cases. And so they're not necessarily doing the will of the people. So some people say that this is a flaw of capitalism, when in fact it's important for everybody to realize that political system is democracy, economic system is capitalism. Which one is superior? The political system? The political system of a country determines what economic system the country is going to use. It's the responsibility to set the rules of the game of the political, of the economic system by the politicians. But what happens is there's been very.
- [25:08]
A
Very wealthy Chinese people that had the equivalent of, for example, Amazon and other things that have been retributed. What do you think of them? Weren't they very much capitalist? And yet they were pulled back and grounded.
- [25:25]
B
I'm not speaking in defense of the Chinese system because I see a lot of problems there. Given that I grew up in America, my interest is to make capitalism something that people realize is a very unique and powerful system that America has. And just as much as the government in China is meddling in the affairs of businesses and making judgments on those people in different ways, the US Government is doing the same exact thing, but under many, many different ways. It's natural for everybody to feel like we need government to protect us. But we have a whole generation. If you go back to, let's say, when I was young, nobody thought that capitalists were going to save the world. They relied on politicians to stop, you know, different issues going on. But for some reason, that's masterful propaganda. The capitalists have concluded with the government officials to basically come up with a narrative that now you have a whole generation of people, young people, that think that big companies are going to save us from environment and from social issues and getting them involved in ESG and DEI and all this stuff. They have put their faith in big business. And from my perspective, that's not the function of business. Business's function is to increase the value of their business, which is a combination of increasing the profitability of a company or the profits, but also reducing the risk. And that means increasing the value within a framework of laws set by the political system. And if any company goes outside those laws, they should be punished. But within those laws, their objective is to maximize wealth and it's still their objective. So when you see them doing things that are complying with government regulations, it's a strategic move that we think we can make more by going this way than that way. We think we can reduce our risk more by doing this versus that.
- [27:35]
A
Right? Very interesting points. Unfortunately, we're coming to the end of our podcast. Where can people get a hold of you?
- [27:42]
B
Just go to my worst investmentever.com and all my interviews are there. I'm there. I've got a little contact tab. If you contact. If you click on that and you send me a message, it will go directly into my personal email. So that's the easiest way to get ahold of me.
- [27:59]
A
Great. I want to thank you very much for sharing your knowledge and experience and saving us from bad investments. Thank you so much.
- [28:07]
B
You're most welcome. Thank you for listening to the excellent, Excellent Executive Coaching podcast. You can subscribe to all Future podcasts@excellentexecutivecoaching.com join us each Wednesday to learn more about the latest trends in leadership techniques.
- [28:22]
A
And bring your coaching to the next level.
- [28:24]
B
To learn more about Dr. Burris CEO mastermind, use the contact form@excellentexecutivecoaching.com.