The Wrath of :Lemons;

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

September 2005

Lemons here naturally do not refer to those fruity type that gives one lots of vitamin C to last a whole day but refer to investments that are sour to begin with, causing bitter (after) taste for their investors-owners who might been bled dry by such investments. Your humble author does not have any fool-proof killer ideas that could weed out such lemons, but the following points may help: 

A)     Investment opportunities that sound :too good to be true; = are generally too good to be true. This is NOT to say there is always an element of .untruth・, just that the promoters (PR consultants, brokers, investment owners etc) might have overly emphasized the potential advantages and overly downplayed the prospective pitfalls, sometimes to the point that it is so .perfect・ that it becomes literally .unbelievable・. Yet if one thinks hard about it, from a logic and probability viewpoint, most if not all things in life are not perfect, which in itself is a very subjective concept (e.g. perfect to you but not perfect to others). Hence, the chance of bumping across something that is almost 100% perfect is perhaps 1/100,000,000,000 and compromise is required. This applies not only to investments but aspects of everyday life. Motto = buyer beware of perfect deals!

B)     Differentiate between sales pitches and independent advice = sometimes the two may not be easy to tell apart and especially owing to disclosure laws and corporate ethics, nowadays many :marketing brochures; do contain much comprehensive data and information just as in an independent assessment report, and sometimes they would even disclose some of the potential risks in the investment. Nonetheless, informative and analytical though these may be, they do not contemplate the opportunity from the individual investor・s angle, which needs to involve assessing the investor・s own particular circumstances and resource, return, and risk parameters to see if the investment opportunity is suitable to the investor.

C)     Ignite one・s common sense = which is not common at all. For instance, say a certain investment opportunity predicts a 100% IRR for 10 years to come, and assume the reasons and supporting data are impeccable without fault and loopholes. At this point, one may want to ask if having 100% IRR is really realistic, for a couple of years, perhaps, yet for 10 years, that will seem a bit far fetched. Unless we are talking about some form of monopoly, such optimistic estimates are not likely to materialize as other competitors will appear and join the game.

D)    Ask the right questions from the right people = some investors would tend to seek an investment opinion from the broker or owner who is seeking to sell them the investment. This could be a probe or just a casual question, yet if they really rely on such advice, and if problems do arise, the investors only have themselves to blame. The reason is simple, fraudulent representation and the like aside, the duty of the broker is generally owed (more) to the owner-seller and not to the prospect. The investor may benefit from asking a 3rd unrelated party for advice.  

In summary, the more lemon an investment opportunity is, the more unbelievably perfect it will seem, because otherwise there is no way for it to be sold.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

  

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