Third, watch for the misdirection; if it looks too good to be true it probably is. The Financial Times reported that the City of London police saw a 400% increase in Covid-19 related fraud in just a month. In the U.S., we have the example of the Great Recession which resulted in a major increase in financial crimes involving private placements, non-public real estate and even certificates of deposit, among other frauds, many of these structured as Ponzi schemes. Most probably seemed attractive when pitched.
A recent private real estate investment opportunity was pitched to several highly paid professional athletes directly in the locker room. The deal was organized and backed by the son of a successful real estate developer and another professional athlete. The locker room representative for the presentation to players was another well-known and wealthy veteran player. The investment was described as a “can’t lose” deal with minimal risk. The investment targeted the need for post-career income.
Professional due diligence conducted on the investment revealed several inconsistencies. The pitch described the deal as minimal risk and a cash-flowing property. What investors were receiving was a high-risk, ground-up real estate development, with no cash flow for four of more years.
Additionally, there was the perception that investors could get their money back at any time, which was inherently false because the deal was highly illiquid to investors. Due diligence also showed those same individuals pitching the deal would not be investing their own money in the investment. In fact, they intended to utilize the proceeds raised through the locker room to fund the purchase of some of their own personal properties and eliminate their risk and debt. This deal was nothing close to what was described to unknowing investors, and at this time, only a few years after it was presented to potential investors, the fund is nowhere to be found.
As noted earlier by Mr. Munger, liquidity is good. In the wake of a crash, everyone talks about how they got back in at the bottom. No one brags about how they jumped in too soon, or lost money in a can’t-miss idea that later turned out to be a scam. There will be good opportunities again once the crisis recedes.
Everyone likes to win; everybody loves a good comeback story. But for now, it’s not necessary to be a hero. Pick the sports metaphor that resonates best with you—don’t score any “own goals,” avoid unforced errors, etc. Either way, don’t let extra downtime make your clients any more susceptible to taking a swing at a bad pitch.
Noel LaMontagne is a former NFL player and a director with Verdence/PRO, the division of Verdence Capital Advisors focused on professional athletes and entertainers.