When it comes to investing, everyone gets a little clouded when they hear about the latest and greatest opportunities that promise very high returns. We all know trendy startups, flashy real estate projects, or heart-pounding cutting-edge tech. The problem is that these exciting investments may not be as profitable as they seem. In fact, they can be downright dangerous.
Let’s take a closer look at why you should avoid such investments.
high risk
Exciting investments often come with great risk. Let’s take a startup as an example. They are like adventurous pioneers venturing into uncharted territory. Even if you have a great product or idea, there is no guarantee that it will succeed. It’s like trying to predict the next superstar musician. Sometimes they are very successful, but often they are not. The same is true for unusual real estate projects and breakthrough technologies. They rely on untested markets and concepts, which can be a very risky business.
confirmation bias
Imagine this. You are keen to invest, but as happens to almost everyone, you only see what you want to see. That is confirmation bias at work. It is our natural tendency to seek out information that supports our beliefs and conveniently ignore information that contradicts them. When you’re engrossed in exciting investments, it’s easy to overlook potential risks and red flags that the return might not be what you expected. Don’t let your mind cloud your judgment.
market hype
Market hype, master illusionist. It can easily lead us astray. Think of trendy startups generating tons of buzz on social media and in the news. It’s easy to get caught up in excitement. But check reality here. Topics don’t automatically lead to financial success. And what about that flashy new technology? It may be hyped as the next big thing, but in reality it may fall far short of that promise. Hype can be a dangerous guide when making investment decisions. In 2019, Theranos was a trendy startup with a market capitalization over his $9 billion. The company claims to have developed a revolutionary blood test technology that can diagnose diseases from a single drop of blood. However, it was later revealed that Theranos’ technology was not working as advertised. The company’s founder Elizabeth Holmes made headlines around the world recently after she was convicted and sentenced to prison for fraud.
Lack of information
Such investments often do not come with the same level of transparency and information as more established options. Suppose you are looking at startups. They do not have a long financial track record, and their potential for success can be difficult to assess. Similarly, exotic real estate projects may lack important details about the local market and regulatory environment. Without the right information, it’s like flying blind, making it difficult to assess risks and potential returns.
emotional decision making
Emotions are a powerful influence when it comes to investing. After all, we are just human. Exotic real estate projects in breathtaking locations may strike a chord with you more than run-of-the-mill investments. But the thing to remember here is that investing is a long-term game. Emotional decision-making often leads to bad results because it prioritizes short-term thrills over long-term gains. In recent years, there have been instances in the Indian market of IPOs causing great excitement and over-subscription as the growth potential of listed companies was recognized. I especially didn’t want to miss the excitement of actually using their services. While some of his IPOs have performed well over the long term, certain companies, especially his IPOs in the e-commerce and technology sectors, have seen their stocks fall significantly after initial enthusiasm has cooled.
The Warren Buffett quote at the beginning of this article is a reminder that the excitement around investing can often blind us to the risks associated with it. It emphasizes the importance of understanding and researching an investment opportunity before jumping into it. Gaining knowledge and making informed decisions can reduce risk and increase the likelihood of a profitable outcome.
Remember, it’s important to thoroughly research and evaluate every investment opportunity rather than chasing the latest glitter.
(The author is a Certified Financial Planner (CM) and CEO of Hum Faiji Initiatives.)
