A BIRD IN HAND IS WORTH TWO IN THE BUSH
At this point, thanks to a couple of simple tests, we’ve been able to assess whether:
there are intrinsic reasons for the asset to grow over time, the environment is conducive to its growth, there is measurable interest from investors.
Based on this assessment, we can decide whether pursuing the investment opportunity is worthwhile or not.
If the asset that has piqued your interest seems promising on paper, there are still two practical aspects to consider.
These are linked to the acquisition and ownership of the asset. Taking these lightly could cost you a fortune, even if the investment shows its potential.
I must point out two common mistakes we often make as investors: one due to negligence, and the other due to ignorance.
Let’s start with the first: we tend to underestimate the costs associated with acquiring, storing, maintaining, and selling the asset.
A perfect illustration of this is purchasing real estate. We find the ideal house to buy: the location is prime, the city is booming, the price is a bargain, and it promises solid rental income. On paper, the return on investment looks appealing. Yet, we often forget to account for agency and notary fees, renovation costs, insurance, interest rates, taxes, risks associated with tenants, and so forth.
Most assets carry costs for transactions, management, custody, storage, maintenance, and transportation. Accessing and owning an asset involves multiple intermediaries, and they don’t work for free.
It’s thus important to acknowledge these costs in your preliminary assessment, as they can significantly diminish the prospective return.
The second mistake is directly linked to ownership. We often think that because we’ve purchased an asset, it is irrevocably ours and nothing can take it away from us.
However, the reality can be very different. Setting aside the risk of theft, there are still many ways to lose your property precisely because of the intermediaries we’ve just mentioned. In many investments, you don’t physically possess the asset; instead, you hold contractual rights to it. If one of the counterparties you’ve trusted for safekeeping your assets faces issues, you can be dispossessed.
And the examples are plentiful: many investors saw the value of their investments plummet to zero in 2008 when issuers went bankrupt. We can also recall the recent failure of the cryptocurrency exchange FTX, which left many unable to access their cryptocurrencies.
In some instances, even if the risk of dispossession is minimal, the value of the asset can still be affected if it is not stored properly. Wine or art collectors know this very well.
The key takeaway is that you should ensure you can access your asset in case of trouble and/or have solid guarantees from the people who physically hold it. Where will you store that vintage bag? Where will you hang that masterpiece? Where are your stocks held in custody? Don’t overlook ownership risks.
If you are confident that the investment could grow over time and that you foresee no issues in its acquisition and ownership, you are almost ready to press the buy button. I say “almost” because there is one last detail to iron out.