When you’re investing in a business, you bring more than just your money to the table.
There is an important lesson in life that not everyone learns: Never be money dumb. Since it’s such a key life principle and falls under the financial sector of life lessons, it’s worth sharing. So what does “never be a dumbass” mean?
Let’s start with a rather unconventional statement: Money is the easiest thing to get. To clarify, if a business needs to raise capital to grow, there are countless options for financing. And there’s a lot of “dumb money” out there – investors eager to put their money into something “sexy” to say they own a piece of it. The hope is that this message will prevent anyone from falling into the “dumb money” trap.
What is “dumb money”? “Dumb money” refers to investments made by individuals who provide capital without bringing any additional value, such as expertise, industry knowledge or strategic insight. These investors usually pursue high-risk ventures or trendy opportunities without fully understanding the business or appreciating the risks involved. Often, they are lured by the lure of high potential returns or the thrill of being involved in something “sexy” like a startup or an exciting project. However, because they lack the ability to contribute beyond their financial contribution, their investment can quickly burn out and their returns diminish, leaving them vulnerable to significant losses.
Dumb money in practice
Here’s what this means in practice:
There are countless stories of clients, friends or acquaintances who have been presented with what sounds like a great investment opportunity. It could be a startup raising money for the next big thing, whether it’s a new medical technology or a new grocery chain making waves in another country. These opportunities are often described as “promising” and “game-changing.”
So what’s the problem with these investments? This is exactly what junk money looks like. Remember, any business can make money. The main question is, what does the investor bring to the table besides cash? In these situations, they are often funding someone else’s dream without providing anything that adds real value, such as expertise or industry connections. Money alone is not enough.
The truth about dumb money
When a lawyer, doctor, or someone else in a high-paying profession tells a story about wanting to invest in a Broadway show, a new sneaker technology, or an innovative product, the same question should be asked: What do they bring to the table? The answer is usually nothing– except money.
The reality is that these well-meaning individuals are turning their hard-earned money into dumb money. Even if the business takes off, there are likely to be two outcomes:
- They will have to continue to throw more money into the venture, as new businesses tend to burn through cash.
- Their small stake will dwindle to almost nothing, even if the company becomes successful.
Look no further than Facebook history and Eduardo Saverinone of its co-founders. Despite his early involvement, his stock was drastically reduced, illustrating how even someone with an important role in a business can end up with far less than expected.
there are there are no get-rich-quick schemes. Success in investing is more about knowledge, skill and being a strategic player than jumping on the next exciting idea.
Be smart, not dumb
This does not mean never investing in a business. It’s about assuring you don’t act dumb. For example, it makes sense for a lawyer to invest in a legal tech startup or for a heart surgeon to invest in medical technology. In these cases, they bring value beyond cash – they provide expertise, industry knowledge and ensure equity.
On the other hand, a lawyer will not contribute much to the production of a Broadway show. If one is eager to invest hard-earned money, it is better to consider something more established and provenlike the scholarship. It might not be the sexiest option at the next cocktail party, but it offers a much better chance of making money – or at least not losing it all.
The next time one of these off-the-wall opportunities comes up, just say so no thanks and avoid being dumbfounded.
This is one of those life lessons to live by: Stay smart, stay strategic and always keep your wealth, health and happiness in balance.
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