Never Be the Dumb Money
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Never Be the Dumb Money
On my iPhone I keep a list of life lessons I’ve learned, read, be told, and quite frankly live by. I’ll think of something, yup add it to my notes. I observe something, yup add it to my notes. I read a fantastic quote, and well you get the gist. When I started keeping this list years ago the first lesson I put on there, not necessarily because of importance, was never be the dumb money.
I figured, since it is a life creed of mine, and it falls in the financial sector of life lessons it is worthy to share with all of you. So, what does, “never be the dumb money mean?”
I’m going to start with a rather perverse concept, which is money is the easiest thing to get. Let me narrow my comment down a little before pitchforks show up at my office. If you are a business looking to raise capital to grow, there are tons of options and ways to get funding. There is also a plethora of “dumb money” investors out there looking to say they own something “sexy” and willing to dole out their money. My hope for all you readers is you don’t fall into the dumb money trap.
Dumb Money
Let me elaborate….
Do you know how many times a client, friend, acquaintance, or someone I just met said I was pitched this great investment opportunity? I can get into this start-up business by raising seed money, and it is very promising. I’ll then inquire what it is, and they’ll say it is this new medical technology that will change the world, or it is this promising new food chain that is blowing up in Canada. If you want to buy me a drink, I can tell you all the “dumb money” things I’ve seen these people invest in through the years.
Andrew, so what is the problem with investing in these businesses? Well, glad you asked. This is the exact description of dumb money. Let me explain. For starters, remember any business can get money. Next, what are you bringing to the table? Money? Did you not listen to my earlier comment? In these situations, you are simply funding someone else’s pipe dream. You bring absolutely nothing to the table as far as talents, skills, and ability to help these companies. The only thing you bring is more cash for them to burn through.
I can’t tell you the number of times a doctor or lawyer friend/client etc. of mine tells me they want to invest in a Broadway show, or a new sneaker technology, or a square wheel. My comment 100% of the time is, what do you actually bring to the table? The answer is inevitably the same, nothing!
The Truth
The truth is what these people bring to the table is their hard-earned money that turns into dumb money. But but but Andrew what if this business takes off because I have faith in my nephew’s roommate’s older brother who went to MIT? I’d first say congrats as MIT is very difficult to get into. Then I’d say on the outside chance that this business takes off, and I mean outside, there are likely two things that will prove to be true. One you will certainly have to throw more money at this venture to stay relevant, as that is how new businesses work, they burn through money.
Two is the 1% share you own if it makes it will most definitely be whittled down to virtually nothing. Don’t believe me go watch the movie The Social Network about Facebook. I mean this is the company all those dumb money investors think their investment will turn into, right? Spoiler alert the “other guy” Eduardo Saverin or LITERALLY THE COFOUNDER made off with a tiny fraction of what he was supposed to get. Remember he was the cofounder, not some passive investor.
There are no get-rich-quick schemes remember that!
So, are you telling me never to invest in a business? Not at all, I would say if you do simply don’t be the dumb money. For instance, I have no problem with a lawyer investing in a legal business start-up. Or a heart doctor investing in a new type of needle he thinks can change the world. You see in these businesses and investments they directly impact the business. These individuals can provide a benefit outside of “dumb money” by having sweat equity and industry intellect. What they can’t do is go act in that Broadway show they invested in.
If you are really itching to invest your hard-earned money, I suggest something more proven and established in the stock market. You have a much better chance of both earning money and more importantly not losing it all even if it isn’t sexy and thus can’t brag at your next doctor, lawyer, or industry cocktail party.
I hope you heed my advice and next time one of these off-the-wall opportunities presents itself; you simply say no thanks I don’t want to be your dumb money.
Hope you enjoyed one of my life lessons to live by and remember to stay wealthy, healthy, and happy.