September 23, 2013   by

celebrity-bad-investments-1-intro-lgAs investors in the chama, sometimes we make mistakes and do a bad investment. It is common to hear friends share stories of investments gone bad. More often than not, they started well did their research, checked the technical’s, considered their risks, and eased their way in. But somewhere, somehow, on some unfortunate day, it all goes wrong. What do you do?

Well, the truth is, many of us don’t want to admit that we have put our money in the wrong thing. Our brains do a real number on us when it comes to money. Patrick Wameyo, a financial advisor, says “When we buy something, the price we pay becomes a permanent reference point.” Psychologists call this “anchoring” and it can sink you financially. For example, if you invest Kshs.100,000 in some shares, and its value drops to Kshs.50,000/- you tell yourselves, “We will sell once it’s back to Kshs.100,000, so we break even.” But that doesn’t make sense. At times instead of improving, the shares may continue to plummet and get down to Kshs.25,000/- as you continue holding on to them. Thus, it doesn’t make sense to hold on to such an investment. Your portfolio decisions should be based on an investment’s potential going forward. To judge if you’re falling victim to an anchoring trap: Look at the investments in your portfolio and ask yourself if you would buy it today. If you answer no, you should consider selling, even at a loss.

Let’s look at real estate. Perhaps your chama has brought flats for rental, which you plan to rent out and make some good money. But due to some unfortunate occurrence, the area becomes crime-prone and the value of your property goes down and you find that the rental charges have also gone down considerably. This means that the rent you collect cannot even pay for the mortgage of the flats and you have to dig into your pockets to top up. In essence you are making losses not profits. What do you do? Be wary of holding on to these flats that you can’t afford to pay mortgage for, because you hope things will get better as you may end up losing this investment altogether when it is repossessed by the bank when you are unable to pay the mortgage at some point. So, the best thing is to give up this investment. Yes, letting go of a property is a difficult decision, but sometimes moving out is the best way to move forward.

Remember that it is the very act of conceding, walking away, cutting it loose, turning your backs on, and unloading a position that differentiates the so-called “successful chama investors from the unsuccessful ones. Keep in mind that as an investor, if you have a bad investment, at some point, you’ll have to let go. The most important decision is “when.” Unfortunately, for many chama investors, the answer more often than not is “too late.” You may hear them saying, “We should have” or “We saw that coming” or “We wish we didn’t” The reality for chamas is this: every chama will lose money at some point. There is no 100 percent fool-proof way to participate in the investment and “win” every time. You can’t be right all of the time so, you need to learn to accept losses and, more importantly, to learn to manage losses.

Patrick says that to deal with bad investments effectively, the most important thing, you need to do is accept the loss. If you’re okay with a loss, you’re less likely to actually take a loss. Interestingly, chamas that don’t want to lose money tend to do so more often than those who have a strategy for how to limit their losses, recognizing they will take losses along the way. Remember, if you’re not willing to take a loss, the loss usually will be greater than necessary. When you take a loss, and you weren’t expecting it or willing to accept it, you’re more likely to hold on to your position for longer, increasing the chances that your loss will become greater, not smaller. This cycle continues until it is so overwhelming that eventually, you take a huge loss and this affects the chama in a very bad way. It’s not necessary or healthy.

Most of this is emotion driven so consider writing out some rules for your chama; give every member a copy and file away a copy as well. Review these rules each and every time you make a trade. This way, you can more objectively make investment decisions and let go of a bad investments before it ruins your whole portfolio.

 

 

 

 

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This post was written by Chamasoft

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