Due Deligence Lessons - The Cocaine Cowboy Almost Tricked Me

Investing Lessons...

Let me share with you three things that I learned the hard way… or rather, things I found out I should always look for in the future.

(This mainly pertains to private deals, but could be used for really anything.)

#1 Cocaine Cowboy

About a year ago I flew out to Texas to look at a big real estate investment. It was basically a new venture that was going to purchase hundreds of single family residences and package them up into an annuity fund that would be sold off to pension funds.

They had a unique way of getting an exceptionally high yield.

I was there for three days reviewing the investment and meeting the players of the team. I got to tour the actual properties and see how everything would work smoothly.

Then, on the third day, I had a private meeting with the founder. He basically spilled his heart out to me.

He said, “Cody, I just want you to know that I can’t wait to have you on board! You know, I’ve had a tough past couple of years. I had been addicted to meth and just couldn’t kick it! But don’t worry, I only do cocaine now.”

Needless to say, I didn’t invest there. But honestly, the deal looked great and everyone involved seemed legit. Maybe it would’ve been a good deal, but I just couldn’t warm up to it after hearing that.

Lesson learned - dig into people’s background a little bit.

#2 Debt Slip Up

I almost invested in a company that made a sports drink.

It was an excellent company that actually ended up being acquired, but under a different team of leadership.

I, unfortunately, was exposed to the deal while it was being managed by the first team.

About two weeks into the due diligence process I ended up getting in a somewhat heated conversation with one of the founders.

I wanted to see all of their financial statements, but they were only showing me a portion of their books.

Eventually, in this heated conversation, the founder yelled at me, “What do you want to hear?! Do you want to hear that all of us are in debt and our possessions are in collections?!”

I responded, “Ummm… no. That’s not what I want to hear. But is that true?”

He responded a little less angry, “Yes, it’s true. But it’s only because we can’t get enough investors!”

I actually have no problem with people who are in significant debt. It means their backs are against the wall and they’ll probably work extra hard.

But, because they were trying to hide it AND because their solution was for investors to invest, I definitely passed.

Lesson learned - dig, even when it gets uncomfortable.

#3 Get it in Writing. ALWAYS.

I learned this from multiple deals I have invested in.

When you are first investing, everything seems exciting.

You are excited to give your money to someone who is going to multiply it for you and the person taking your money is excited to spend it.

It’s like a honeymoon period, where both parties are just happy in the moment.

And then shit gets real.

Deadlines start getting passed, debt starts racking up, appointments are missed, updates are neglected… the list goes on and on.

The worst part is that there are no formal ways to deal with these issues. Because nothing is in writing.

No back plans or ultimatums are written down. No exit strategies or partnership agreements are agreed upon.

Little by little the investment grows into an awkward relationship that has moments of anger and panic. To make it worse, huge sums of money are at risk and no one can decide on how to fix problems.

Lesson learned - write down every possible risk you can think of and make a solution for it. In writing.

Those are just some of the things that come to mind. I write several times a week about investing and building wealth. I’m sure I’ll learn a lot more in the future that I’ll share - and it’ll probably be at my expense!