My wife and I learned this lesson the hard way. Some time ago, we had the opportunity to make an investment in a start-up company that was hoping to go public. After considerable deliberation and time, we decided to go ahead and invest an amount that we were comfortable losing (at least that’s what we thought at the time). The promise of a big payoff was just too good to pass up. Within months, the company went bankrupt and we lost everything that we had invested.
I wasn’t sure what to take away from this experience until I was listening to a Goldman Sachs investment banker during a lecture series on financial planning. He asked the audience midway through his lecture, “What is the number one thing that you should consider when making an investment?” A few dozen hands went up and one student responded, “The return.” To our surprise, our lecturer said, “No.” Everyone’s hand went down. After coaxing us for a few more minutes, someone finally ventured, “Liquidity.” Again to our surprise, our lecturer said, “Bingo, that’s it.” He went on to tell us of an investment that he and his wife had made in the movie The Other Side of Heaven and how they had lost everything. The real kicker was that as they realized that the investment was beginning to slip away, there was nothing they could do to recuperate any portion of their money.
At that moment, I realized that the lesson I needed to learn from our attempt at a small fortune was that we should not make investments where we had no means to recuperate our money even if it was at a loss. We have since added an additional rule to our investment guide – every investment must offer liquidity. The average family does not need to take on that much risk. Although the opportunity for gain may be large, the financial risk associated with non-liquid investments outweighs the potential return. Don’t let greed get the best of you or your money. Had the investment that we made had some option to sell our shares, then we could have minimized our loss. However since we could not sell or transfer our shares, we lost everything.
There are many factors to consider when making an investment and maybe liquidity isn’t the leading one. However, make sure that you have an out, even if that out means at a loss, before investing your hard earned money. If you have no out, then there is probably somewhere better to put your money.