Co-edited by Scott J. Kaminsky: CFP ®, Financial Advisor, and Vice President of The KR Group at Morgan Stanley Smith Barney, LLC
One of the most interesting yet burdensome challenges a Professional Athlete faces is the endless abyss of business opportunities presented. Let’s face it, you have money and others want it. Or, at the very least, entrepreneurs know you have money, and want you to join their posse so that you can fund their project. Many of these opportunities can be extremely profitable, while others can be total shams. So how can you tell the difference? Or better said, what should an athlete, or any investor, look out for when considering a business or investment opportunity?
Notice how I used the words “Look out for” instead of “Look for.” The reason I chose these words is because, unfortunately, too many investors lead with “How much money can I make?” If you, the reader, can take one thing from this article, consider leading with, “How much money can I lose, rather than how much can I make?” And therein lies the first and most important point—RISK!
1) Never invest in an opportunity, no matter how seemingly great, if its failure could devastate you.
No matter how much profit could potentially come from a wise investment idea, if the result has the potential to do irreparable and permanent damage to your personal finances, the opportunity should be dismissed without hesitation. Consider this analogy. If your trainer described a new training technique which may improve your game by 20%, but the side effects could render you very sore for a few days, you may consider the benefits worth giving it a shot. However, if the side effects of this additional training technique could either cripple you or even kill you, I’m assuming most athletes would not take the risk. So then we ask ourselves, how much game time improvement would be necessary in order to accept the risk of a possible crippling injury caused by this new training technique? Hopefully, the answer is none.
Returning to the topic at hand, if we determine the level of risk to be too great, the profitability can be, in most cases, considered irrelevant. It's easier to tease yourself because you missed an opportunity, than it is to tease yourself because you went broke.
2) It is wise to be sure that ALL partners have money at risk.
Have you ever been presented an investment opportunity by an individual who claims that their experience is what they bring to the table? It’s very important to realize that individuals behave different when risk is at hand. If a leader of an investment group has your money to risk but not their own, there is a high probability that they will accept significantly greater risk because, at the end of the day, it’s not their money they’re risking. This is such an important concept to understand, especially for Professional Athletes who represent a wealthy cross section of the public with limited financial experience.
A traditional partnership is made up of General Partners (the decision makers) and Limited Partners (those without decision or voting rights.) This structure is very common and should not be perceived as dangerous simply because not every investor is a decision-maker. In fact, if you think about it, do you really want every partner to have an opinion? After all, this article is predicated on the idea that certain investors don’t have the necessary education to make informed decisions. As such, the General Partners (decision-makers) should be those that are financial professionals.
Nonetheless, it is important that all investors have something to lose. This fundamental concept puts all partners on the same page. By no means does this single concept ensure that all partners are in agreement, but it’s a start.