Avoid Getting Caught Up In Investment

A more sceptical approach to investing needs to be adopted to avoid or reduce the loss of capital for investors.

- Asief Mohamed & Tinyiko Mabunda

With an increasing rise in the cost of living and a contracting economy, there is a lot of pressure to deliver above-average returns for investors. The hunt for lucrative investments is a fierce one and investors will often overlook the qualitative red flags associated with potential investments in search of the hidden gem.

There is no one successful method to detecting a financial scam. Investors cannot, unfortunately, be fully immune and protected from such scams. Even highly experienced and educated portfolio managers sometimes fall prey to companies that, at the time, seemed undervalued. But then they’re confronted with the salty blow of a company’s Sens announcement notifying shareholders to disregard the reliability and accuracy of their financial reports.

It is important to avoid the “noise” around seemingly tempting investments and to conduct thorough due diligences. In addition to constructing a financial valuation with a high margin of safety, investors should also place emphasis on qualitative research such as environmental, social and governance (ESG) analysis.

Often, anecdotal evidence helps one steer away from scams. Investment analysis is no longer just about numbers; a more holistic approach to research is needed when determining the quality and value of an investment – such as factoring in the notion of “once a thief most likely always a thief”.

‘Too good to be true’ investments

In the search for alpha and overall outperformance, active investors are always looking for under-valued investments. Once invested, it’s easy to justify remaining in an unsuccessful investment to avoid admitting one’s error.