Are Crowdfunding investments a good idea for dividend investors?

William - Rookie stock investor

Mike, I've been tempted by crowdfunding investments - particularly one in a new technology company called Recycling Technologies who are about to start mass producing a machine that converts plastic waste back to oil. Check out their video below: 

It looks like an great product that the world really needs, but I have Ben Graham's cautionary words  about new tech statistically being a bad investment from "The Intelligent Investor" ringing in my ears.

The pitch page for the investment is here

I have a feeling you're going to hate the unpredictability of the return of crowdfunding investments and the likely time lag between investment and any sort of dividend income, but I just wanted to ask you if you would ever consider crowdfunding investments like these...?

Hello William,

you're right that crowdfunding investments are not something I would get involved in. To me, there are far too many uncertainties: The product may fail, turn out to be unviable or lose out to better competition and all of those scenarios will leave you losing your entire investment.

What's more, it is entirely possible that this could turn out to be a great idea or great new innovation but you still could lose out because as an investor as you can easily be diluted out before the venture becomes profitable or the initial valuation forced upon you by the crowdfunding model (the more they raise, the less you'll own) could be miles off. 

Before I continue, it is important for me to emphasize that there are many ways to make money or strong returns. Just because I'm sceptical doesn't mean that you can't use different methods to be very successful.

An "investment" like this could be very lucrative to insiders or some investors who do time their investment correctly. Technological innovations like this can also be fantastic for society as a whole and one of the reasons why capitalism is so successful. 

Ultimately, though, Crowdfunding investments simply don't offer any security

As an investor, though, my first priority is the safety of my  principal investment. This is outlined in chapter 20 of Ben Graham's book "The Intelligent Investor" called "Margin of Safety". 

A pithy quote from Warren Buffett also occurs to me as I write this, about his two most important rules in investing:

"Number 1 - don't lose money and Number 2 - don't forget rule number 1." 

To me, the odds of losing money on crowdfunding investments  is just too high. A lot of innovative products can sound like the next "big thing" but often turn out to be flops.

To me, you need a history of solid cash flows, continuously high returns on equity and a solid balance sheet. This is more like a "start up" investment that is likely to consume capital, may have a lot of competition, and you have no idea how you will be treated as an investor by the management team. 

If you have some special knowledge or know the industry well then this idea could present a good opportunity. Otherwise, my advice would be to treat this as a speculative investment. If you want to have a flutter, then that is fine but you should be prepared to lose all your investment and you should strictly separate your speculative plays from your true investments. 

I feel a little like Yoda in the Star Wars movies, but I'd like to add this: If I am to fulfil my role as mentor to you successfully, I would recommend you go back and re-read the page we posted a while back on whether you're an investor or a speculator.

Mike - six-figure dividend earner

Mike - six-figure dividend earner

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