Perhaps the most high-profile business collapse of the year has been the construction giant Carillion, reinforcing the message that no business is too big to fail and that no-one is immune to investment failure.
It prompted questions over the integrity of its auditors KPMG, who in March 2017 had expressed no concern over reported profits of £150m, even though four months later these proved to be illusory.
It also prompted an exodus of investors once the company’s debts became clear and confidence in its viability plummeted, thereby precipitating the collapse.
But should the investors have known better than to trust a business that diversified into a range of disciplines outside its core competence and embarked on a series of take-overs?
There are many causes of investment failure. It is not a precise science and it does involve a degree of trust, not to mention emotion. Too many investors fail to carry out due diligence before they decide where to put their money.
So, the first thing to do to guard against investment failure is to check more than your target’s profit and loss account. You should also look at its balance sheet and its cash flow statement. You might also ask if you understand the business, how it makes money and what it does with the money it makes. It is all about understanding and assessing the risk factors.
Some causes of investment failure
These include a lack of knowledge about an investment prospect, failure to understand why someone might be recommending an investment or using stock analysis reports from sources that are less than trustworthy.
Having no clear goal or strategy when investing is another pitfall. Knowing what you can comfortably afford to lose and how strong is your appetite for risk is essential.
Investment requires discipline and the ability to be patient as well as identifying the right targets for your investment. It helps also to have a financial adviser you know and trust, who will guide you to developing an appropriate balance of risk weighted returns in your investment portfolio, so that it is not over- or under-diversified.
Another trap that can lead to loss due to poor investments is over-confidence or expecting a significant return in a very short time frame since this becomes like gambling. Investment is, or should be, a long term activity with a level of monitor of how your investments are performing making decisions about your portfolio.
Finally, it is important to remember the warning that the value of investments can go down as well as up, indeed some investments can be wiped out where for most investors the strategy should be based on understanding risk parity.