Don't Be Fooled by an Ugly Investment Wrapped in a Pretty Package Separating the Winners from the Losers Successful promissory note investing (like all investing) is separating winners from losers.
All investing is based on predicting the future performance of an investment; you write the check today in anticipation of receiving a bigger check in the future.
The reason you select the specific investment asset today is based on your understanding its current financial information; and then you project that information forward.
Your goal is to select a future winner based on today's information.
5 Top Promissory Note Danger Signals 1.
Big Discount-Low Price: a promissory note with a lower-than-usual price that appears to be a bargain.
Many "cheap" notes are cheap for a reason - their future prospects are in poor or are in decline and getting worse.
Take the time to understand the investment.
2.
Interest Rate Above Market Rates: An unusually high interest rate can signal an unusually high risk level.
Borrowers do not voluntarily pay a higher interest rate than the market rate, unless forced to by smart investors.
Smart investors demand a high interest rate to support a high risk level.
3.
No Collateral Security: A safe promissory note should have two means of repayment.
The borrower's promise to repay is the first repayment method.
The second method should be the liquidation of the pledged collateral security.
The most common collateral security is a lien on a parcel of real estate-a mortgage on a house is a primary example.
A note lacking collateral security is a danger signal.
4.
Inadequate Collateral Security: Having collateral security that is of little value, or of inadequate value, or of unknown value are all danger signals.
If a loan secured by a mortgage on a house was made five years ago, and the promissory note is being considered as an investment today, the value of the mortgage house must be valued as of today's values.
A five year old appraisal of the house is meaningless today.
5.
Incomplete Loan Origination and Servicing Documents: If you are evaluating an investment in a new or existing loan, the following key documents should be in the note file: promissory note, collateral security documents, collateral appraisal documents, payment history, loan closing documents, and the lender's title insurance policy.
7 Basic Investment Rules 1.
When you're uncertain about the risks of an investment consider paying more for one that you feel more certain about.
2.
Don't Blindly Buy "Cheap" promissory notes-evaluate what benefits and risks you are getting.
3.
Invest in promissory notes you understand; if you don't understand, don't invest.
4.
Improve the odds of success by taking the time to understand the investment.
5.
To avoid overestimating values, have a 25% margin of safety protecting you.
6.
Stick with the easy and obvious investments; avoid the complicated ones.
7.
What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know.
Conclusion 1.
"An investment in knowledge pays the best interest.
" - Benjamin Franklin 2.
"Be fearful when others are greedy.
Be greedy when others are fearful.
" - Warren Buffett 3.
"Many individuals know the price of everything, but the value of nothing.
" - Phillip Fisher 4.
"The individual investor should act consistently as an investor and not as a speculator.
" - Ben Graham