By J.P. Dahdah, Founder & CEO of Vantage
Alternative investors share a common struggle in identifying the best way to gain access to and select high quality opportunities. All of us want to direct our hard earned savings into strategies which yield the best results while simultaneously limiting our portfolio’s exposure to loss. Prior to a selection being made, there are a multitude of questions an investor must answer to feel confident they have chosen wisely. First, you must decide how much of your nest egg you are seeking to deploy into a specific opportunity. How much can you afford to purchase without over exposing your retirement savings to unnecessary risks? What are the fees involved? What is the holding period? What asset class will deliver the expected return on investment? Does my selection improve my diversification? What structure will be used to implement the strategy? Who will be managing the investment?
On and on you probe through your list of important questions that need to be answered with a high degree of comfort before we are emotionally and rationally able to execute the transaction. We must feel and think it’s the right decision before we move forward and actually transfer funds into the deal.
But who helps us get to the list of alternative investment choices we must pick from? Who helps us filter and create a menu of prospective deals we should consider for investment?
In my twenty-plus years of experience helping people with their financial affairs, I have found that the answer lands squarely on the shoulders of a “Trusted Source.” Each of us has at least five trusted sources in our financial life we depend on to help us make informed decisions about our investments. I define a trusted source as anyone or anything an investor utilizes to get them over the hump of evaluation and into actionable execution of the investment purchase (i.e. cutting the check, funds transfer, etc.).
For decades, affluent investors have touted the belief that an investing edge can be gained by “who you know and not what you know.” I haven’t found any validated research or data that can prove that simply by having more access to selective deal flow improves the relative return of any specific alternative asset opportunity.
However based on personal experience, I have ascertained that most investors perceive deals made available to them by their trusted sources will somehow produce a higher probability of success than the average investor can garner. The reality is most of our network of trusted sources are simply people in our life we respect, we think are really smart, we believe their access to information is better than our own and they rank equal or higher than us in net worth. As you read this article, someone in your life is probably coming to mind as being one of your trusted sources, right? In addition to the short list of intelligent and successful friends, family and colleagues we consider as our trusted sources, some of us also have a list of trusted professionals and advisors who help us vet and select alternative investments. If your investment appetite leans towards real estate, for example, you may have a real estate investment agent who constantly brings you deals which fit your investment criteria. Trust has been gained over time with this professional based on either the referral that was given to you by one of your trusted sources, or the actual positive investment performance you have experienced working with them personally.
If a trusted source does their “job” and delivers on providing you access to high quality alternative investments that perform as expected, they stay on the list and are leveraged continuously time and time again. That is until one of their deals doesn’t perform. Once a trusted source misses the mark once, chances are your natural inclination is to test the recommendation of a different trusted source from your list in hopes that their recommendation will perform better. The truth is you will never know how good the recommendation is until you exit the investment, regardless of the perceived quality of the trusted source that presented it. Even if your great pal Warren Buffet happens to be one of your trusted sources, please remember that even his investment selections don’t always make money either. Having access to who you believe to be a high quality trusted source doesn’t guarantee making investments into high quality deals that make you the money you desire. I encourage you to not put so much blind faith into your trusted sources, even though I know you will continue to use them to help you vet deals. I kindly ask you to accept my friendly reminder that even deals being presented to you from trusted sources (even those with a perfect track record to date) have risk which must be respected, analyzed and properly accepted prior to directing any money into them. I wish you luck in choosing wisely!
Happy investing!