Why Cornerstone Investors Aren’t Justification For Qualifying An Investment

I had a chat with Bill from Snowball Effect a few years ago on the subject of cornerstone investors. It seemed to be his view at the time that having a cornerstone investor gives confidence to small investors that the investment is qualified (i.e. worth investing in on the same terms). I didn’t agree with this at the time, but I didn’t articulate my reasoning. I’ve given some thought to this and thought it might make a good subject for an article for the website.

In short, my logic is that an investment is only worthwhile if it fits in your portfolio. More than that however, the reason for fitting in your portfolio affects the valuation, which affects whether you should buy it or not.

Consider this: A very, very rich man may be more focused on protecting his wealth than amassing more. Therefore an investment that returns exactly the rate of inflation with no growth prospects, no way to get your money out and no way to fail would be the idea investment for such a person. That person may purchase a cornerstone shareholding and be very content with their investment.

Similarly a person saving for a house or trying to grow their savings into an early retirement might find this to be a very, very bad investment.

There are a number of other scenarios such as a cornerstone investor might be buying into an investment for leverage over a company to help one of their other investments. There are a number of other reasons a cornerstone investor might invest in something that is not copacetic to a small investors interests, but put simply, this is a common scenario why a cornerstone investor is not justification for investing, and you should always do your own research, planning and calculating.