I Make a $75,000 Mistake

Even though we know you must make mistakes to learn, they are still painful. One way to look at a mistake is to use some of the rules suggested by the great investor Charlie Munger. I’ve made well over 100 mistakes in my investment and business life. I still learn from them, and I want you to be able to do the same.

Occasionally, I’ll drum up the courage and share one. Here are some lessons from my recent $75,000 mistake. 

It was a company that would revolutionize investing in real estate—fractional shares. The public could buy a small part of a building and then sell that share at any time as you would a publicly traded stock. It sounded good, so I did my background and due diligence and invested my first $25,000 into the company. I waited until they had OSC approval for the trading platform and then invested another $50,000. A famous investor joined their board. What could possibly go wrong?

I won’t get into all the details except to say I’ve written off the investment. My shares are not worth anything. Here’s what I missed about this concept.

1. While the concept sounds great, it requires the public to change their behaviour. Buying a part of a building requires trust in the people setting up the structure. Real Estate is complicated; the people starting this company were idiots regarding understanding real estate. The public would have a hard time understanding the investment concept.

2. Software experts know nothing about investing or real estate. I didn’t separate the two different companies that were involved. One was building a platform and getting regulatory approval, and the other was real estate investing. If you aren’t great at both it fails.

3. I didn’t meet the primary owners until AFTER I invested. I engaged in emails but never talked to them. I can learn a lot by talking to people, as that’s part of my skill set as a retired psychologist. I ignored using one of my skills that would have helped me understand why the owners were idiots, and I a bigger one for investing in them.

4. Never try to make sense of stupid behaviour. I had challenged them on several real estate investment issues. I believe the CAP rates weren’t calculated correctly; the first properties purchased were stupid, losing investments. I would have never purchased the two buildings they launched with. They highly overpaid for the buildings. I tried to make sense of this when my real estate instincts told me to walk. The real estate “stock exchange” was too compelling and lulled me into a sense of more confidence. I was more than 50% sure the investment would work because of the OSC approval.

5. I didn’t ask how the building purchases would be financed. Initially, I thought all would be financed from the investments, but that was not the case. Investors provided the downpayment, and a lender provided the balance. I had no idea these were variable-rate mortgages with B and C-rated lenders. I was an idiot for not asking more questions on how the buildings would be financed. 

My stupid mistake was not separating the real estate company from the software platform and OSC-approved part of the company. The latter lulled me into a sense of increased confidence that was the failure. BOTH parts of the business had to be successful to work. Most importantly, the founders knew nothing about real estate and believed they did. They didn’t know what they didn’t know, ultimately the failure. I didn’t see that until it was too late. It was an expensive mistake.

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