Sometimes my readers and clients look at me like I am infallible. This is simply not true - rather, I use my knowledge to help them succeed to the best of their own limits and I also try to help them avoid my mistakes.
My mistakes are not small, either, and this is the biggest investment one of all.
In 2019, I cleared my Million Dollar Round Table (MDRT) for the first time. This meant that I had made (well) over $115,800 that year.
I had invested quite a bit of money already and set up a new regular investment plan as well, yet I had quite a bit of money left in the bank. This left me feeling good - and perhaps a little too complacent.
A Facebook advertisement caught my eye shortly after - promising a 2% guaranteed return per month for 3 years.
Normally this wouldn't be something that I felt was necessary, but between a much-needed income boost and my curiosity to check out investment competition, I answered the advertisement and attended a meeting held at Orchard Towers.
Despite the shady outside appearance of the building and its unfavorable reputation, the upper floors were well renovated and clean. Interested investors gathered in a board room with a long table (seating perhaps over a dozen people) and were presented with an opportunity abroad.
With such a promising investment, there was a pretty extensive Q and A after which I thought was handled a lot better than many private businesses that I had consulted for, or helped, or even invested in.
The Investment
Batam was a growing tourist destination Pre-Covid. The offer was for investors to invest in the renovation of a hotel, that was well located and easily accessible to the public by Ferry.
An investment of $50,000 SGD would allow you to purchase one hotel 'room' that rewarded investors in two phases:
Phase 1: You would receive a payout of $1000 a month for a minimum of 12 months, up to 36 months dependent on which the project was completed. If the project were completed earlier than 36 months, the payouts would cease immediately and move straight to...
Phase 2: Your capital would be returned to you, but an offer to own that 'room' and a portion of the earnings of the hotel as equity would be presented. You could sell off your 'room' for the value of it (presumably your capital + growth) or keep the passive income as a shareholder of the hotel.
All these details were shared quite transparently, as well as verifiable and significant evidence that the project could succeed.
READ ALSO: I Discovered A GUARANTEED 15% Property Rental Return with ALL of its Issues! (Pros and Cons)
Due Diligence Conducted
1) The Management Team:
The management team was run by former employees of prominent Hotels, some with over a decade in leadership positions of hotel administration. It was not difficult to verify this.
The key director was someone who had chanced upon this opportunity due to his experience in the field as he personally knew the owner of the unrenovated hotel and was able to purchase over it at a huge discount. He was relatively charismatic and knowledgeable, and the information he offered was transparent and readily available.
2) The Hotel:
The company offered free tours of the hotel (ferry trips down twice a month), and the hotel itself was googleable. The information found online largely supported the company's position (that it was owned by someone who the Director knew and even reported some of the reasons the hotel was incomplete).
The location and other factors were exactly as how they were presented. It was also visually pleasing.
3) The Applications, Processes, Grants, Etc/Effects of Governance:
My primary question was why the payouts could exist when the hotel wouldn't even be constructed yet, let alone be in business. Investors were shown a grant promise by the government if the project were to take off (one of those cute little things where they support businesses and whatnot to bring in Tourism for Indonesia).
The money was substantial and supported, and proof of these applications and promises were shown upon request. (Which I no longer have after the theft of my laptop), although some were not sent.
Naturally, after construction was completed, they would want the rest of the money to focus on building the hotel and moving to Phase 2, so they would cap the payouts at a minimum of 12 months but could stop any time after that.
4) Realistic Projections:
The projections for the payouts were surprisingly realistic, at least based on the research I had done around similar hotels at the time. I recall very little of this with great detail, but one of the more vivid things I remember was that Tourism could not improve at all the next year and it would still more than meet the projections of the business.
Of course, we all know what happened next.
5) The Guarantee and Legal Contracts:
The Contracts were not very well done, as fedback by a lawyer friend I asked to vet. He suggested formal clarification on some of the wordings which I fedback to the director, and ultimately concluded that the contract would be legally binding.
As you know, the advertisement promised guaranteed returns. This guarantee was personally guaranteed and signed off by the director and his supporting manager, with their ICs on the line. In a legal situation, they really had no way out short of personal bankruptcy. It was hard to pass up on that kind of downside protection.
Red Flags/Lack of Diligence:
1) Taxes:
I distinctly remember not doing any diligence on the taxes and how it might affect projections. Taxes on owning the property was one of the factors that the director claimed eventually led to the failure of the project.
2) The Management Team:
The Management team had no experience in entrepreneurship nor investing. It was clear from extended conversations with them, but I overlooked this due to the Director's experience and quite a lot of his employees had faith in him.
Usually, I tend to have a good impression of people who were good workers when they were employees, who command respect and loyalty of other employees to drop everything and start a business with you at the helm. That was a little short sighted on my part.
3) Unforeseen Circumstances:
No diligence was conducted on other unforeseen circumstances like natural disasters etc. The promise of guarantee and a legally binding contract that was assured by my lawyer would play out, was enough for me to dull my diligence in this area.
When Covid happened, that played out as you would expect.
The End Result:
Payouts were successful up to about February 2020, before pausing as Covid hit mainstream news.
Email correspondence with the company suggested that construction was being halted by the government. While part of the government grant should have been paid out already, the decisions by management followed a schedule of completion and the Management claimed that Money had temporarily ceased.
Covid was expected by many, including the Management Team, to be a temporary thing lasting only several months. A formal, though somewhat unprofessional, email was sent out in a rush to assure investors that things would resume to normal soon and to apologize and compensate for delays.
This provided assurance up to a certain point of my personal impatience, where I sent several emails denoting my impatience, then anger, then proceeding to make legal threats. Email correspondence with apologies soon became slower and few in between, until one fine day the email itself simply became non-existent.
Furious, I utilized the personal contacts and emails of the manager and director themselves, hounding them to no end and lecturing them about irresponsibility and unprofessionalism. Of course, I understood that Covid rendered this entire project moot, but a guarantee is a guarantee.
After lackluster correspondence through Whatsapp, the Director pleaded with me and declared that he had been made a personal bankrupt.
My first reaction was to be pissed that I hadn't taken additional measures to ensure I was paid first in the event of bankruptcy, which is something I do try to do when it comes to my investments and bonds in private businesses.
After I recovered, my next move was to confirm that he was indeed a personal bankrupt. He had no problem sending supporting documents which I quickly verified online (and I even had to pay money for it).
The deal on the contracts was a guarantee barring personal and professional bankruptcy, so I resolved to end the matter.
Closing Thoughts
It's usually hard not to feel foolish when you make a bad investment.
It's not like a Unit Trust or Index Fund investment, that's diversified enough with recognizable and reliable holdings where you know that it's a temporary setback, an impermanent loss. That money, that labor is gone forever.
For me, it was quite frustrating and emotionally wrecking for a little while because the money wasn't that easy to earn. A lot of it was eased with proof of the Director's bankruptcy, and years after this incident I even have a certain amount of sympathy.
Running a business with the pressure of employees, shareholders and your family isn't easy.
Many of my private bonds are designed with a similar feature - capital preservation or bankruptcy. No half-measures allowed. But this puts business partners who I get to know personally and professionally at great risk to themselves, and I definitely care about their success - not just for my own sake.
I also know the anxiety that comes with running a business - especially when you're more inexperienced or simply not as good as you thought. I imagine that the Director with 15 years of experience in Hotel Management and a loyal group of employees which gave up their jobs to follow him - must have had quite a lot of initial confidence.
But with those employees counting on him and being a first-time entrepreneur while never having managed millions of dollars of investor/shareholder money...also came a lot of expectations and pressure which I definitely sympathize with, being a business owner myself.
The experience of losing this money ultimately made me a more prudent and effective investor.
Today, my personal track record still stands at 32.088% annualized returns from 2017 to 2021, or around a 300% gain in 5 years. I've taught consultants with integrity how to duplicate my methods and if you're a suitable client, I'd love to see you reap the benefits of these effective, long term investment strategies.
Do feel free to contact me at 91769099, where I can qualify and refer you to consultants with competence and integrity, who can help.
Luke
Money Maverick