The Most Expensive Burrito I Have Ever Bought
By: Davide Migali
Tags: Bonds, Investing, Money, Fixed Income, Financial Freedom

I have always been interested in finding ways for my money to generate a return, and I have found the idea both amazing and almost immoral.

I can see why Einstein described compound interest as the 8th wonder of the world, and, at the same time, I can completely understand why the Old Testament and other Holy Books condemn the practice of charging interest on a loan.

Investing is a dark art, and, like many others before me, I have been burned while practicing it (and, likely, I will be burned again in the future!).

One of such episodes was quite brutal partly because of the amount lost (at the time, £10,000 was a large chunk of my overall portfolio) and partly because of the speed of the loss (the entire amount vaporised basically overnight). I am willing to tell this story because it provided me with two very important lessons on investing, which then shaped my investment strategy going forward and which I think could be useful to other investors too.

The Opportunity

A few years ago, a Mexican fast-food chain called Chilango decided to issue a new round of corporate bonds to fuel their expansion in London as well as in other locations within the United Kingdom.

I always loved Mexican food and, since I moved to London, I found myself multiple times at one of their stores. I really liked their burritos and their fresh and colourful brand. The service was fast, but queues were naturally forming outside of their stores. I interpreted these as good signs.

The company used a crowdfunding site called Crowdcube to issue their bonds. I have used the site before to buy similar bonds in a coffee shop chain called The Grind (whose investment successfully paid off — a classic case of beginner’s luck), so the process felt safe and familiar.

I looked at their financials, at their beautifully crafted pitch videos, and at their expansion plan. All looked good. The company offered an 8% interest coupon and a few other perks to the investors. It seemed a good investment, and the bond offering was oversubscribed, with £3.7 million raised compared to the company’s original target of £1 million.

I pulled the trigger, received my bondholder certificate and my Chilango Black Card, which entitled me to a weekly free burrito for the next five years.

But I was about to realise that there is no such thing as a free lunch.

The Collapse

Around seven months (!) after the bonds were issued, I received a communication that the company was seeking a company voluntary arrangement with their creditors. The company was facing an overwhelming amount of debt and was asking to all their creditors to find an agreement on how to reduce it. Failing that, the company would likely have to declare bankruptcy.

Without going into the details of what happened and why a company which just received £3.7 million became suddenly insolvent (the legal proceedings are still ongoing), I knew, in the moment, that my money was gone forever. The company assets were just the brand and some kitchen equipment, and the business’ profitability was clearly put into question.

Nobody likes losing a good chunk of their money, and it is of no consolation to think that probably something dodgy happened behind the scenes. I knew it was a risky investment, and I have entertained the possibility of losing part of or all my investment. But when something like this actually happens, when a chunk of your post-tax savings disappears in an instant, it hurts.

I was angry for a few days, but, surprisingly, I got over it pretty quickly. “Don’t hate the player, hate the game” is something that I often repeat to myself when I lose at any game that involves at least a modicum of skills.

I wanted to reframe this mistake as a learning opportunity. It was a £10,000 course on how to lose money quickly and absolutely. There was certainly something there for me to understand and, at least, to not repeat going forward.

The Lessons

I had another look at the financials, but I couldn’t identify any obvious red flags. I looked at the financial commentary around that time — many flagged the investment as risky, but that was a given. No one outlined the reasons why such a company was destined to fail.

Was it just a run of bad luck? After all, thousands of other people invested with me, and prominent names of the food industry-backed the project. Were all of them fools?

And yet, I wasn’t satisfied with this easy absolution. It is too convenient for our fragile psychology to find comfort in the fact that others were fooled too. That wasn’t me, and, more importantly, that wasn’t true.

At last, the epiphany came in the form of the two lessons below;

1) What is the Upside?

Investing is the financial equivalent of “seeing the future.” Nobody can see the future and, therefore, nobody can always place a perfect investment.

Is investing like gambling then? Not exactly.

When we invest, we need to identify the opportunities with the biggest upside. When the future is uncertain, we need to find opportunities capable of delivering exponential returns. Most will inevitably fail, but those that succeed will repay us for all the losses AND return a profit.

Back to my story. Is a Mexican fast-food chain capable of delivering exponential returns? Of course not. At best, it could be a profitable business. At worst, it would collapse under the pressure of competition, higher costs, and customers’ fleeting preferences.

This will never be a good investment not because of some dodgy financial statements but because it lacks sufficient upside. And anything that lacks significant upside will ultimately implode over time.

When it comes to investing, we need to look at those companies that, if successful, will deliver exponential returns to their backers. Think of the economic impact of discovering a cure against Alzheimer's, or of inventing a propulsion system capable of taking humans to Mars, or simply think of any company capable of creating a quasi-monopoly in their elected market (like Google in the search engine domain).

I am not saying that every restaurant or every clothing shop will be unsuccessful (far from it!). I am saying that their intrinsic upside is limited, and if all our investments have low intrinsic upside, we are destined to lose money over time.

2) If We Cannot Make 100 Bets, We Should Not Make 1

Identifying investment opportunities with enough upside is not enough. We also need to be able to sufficiently diversify our investments.

In high-risk domains, the vast majority of companies are destined to fail. It would be foolish to YOLO all our money into one opportunity as, probabilistically, this is a certain recipe for financial failure.

We need to be able to allocate our money among the largest possible number of opportunities, even better if our investments fall in different industries and markets, to lessen the overall risk on our investment portfolio.

If we don’t feel we can truly diversify our high-risk investments because we lack the necessary funds or because we prefer to invest some of them elsewhere, we should probably refrain from investing in these types of opportunities altogether.

What did you learn from a bad investment that you made? Share your story below and help everyone improve their understanding of the world of investing.