My lessons learned in investing via a Limited company

1. The goal of this article

Investing may be fun. However, starting is always challenging. This article may suggest some questions you should ask yourself before your investing journey.

It is not enough to start investing with some facts without a deep understanding of them. More importantly, we should know that all of them have some drawbacks. We all know that putting eggs in one basket is terrible, but can we blindly follow this advice? If one reads or watches a few blogs or youtube videos about investing, one would think that everything is crystal clear and what to avoid.

I will show that there is a next level which is most likely not present in those shallow videos, ‘how to be rich quickly’ or even university courses. Lastly, if you go to my Lesson Learned section, you’ll read about my 2-year worth of knowledge so you can avoid my mistakes and lose less money in the long run.

2. What was my plan

In 2019 I realized I have some money earned from my Software Development main activity, which incurs more than 50% tax if taken immediately to my private account. Taking money from LTD in dividends and then investing using those personal funds didn’t also have other benefits, which are present when you’re doing that via a limited company.

Thus, I knew I had to invest as a business rather than an individual. The only problem was I didn’t know where to allocate my money. My goal was to become financially free.

Financially free people passively earn enough money to cover their everyday expenses without decreasing their quality of life.

I found that most people aiming for financial freedom on the internet were investing in P2P (Crowd lending): many people lend money or buy apartments to let. Many new platforms had better interfaces and seemed more straightforward than high street banks / investing platforms.

Additionally, I wanted to achieve my goal quickly, not wait until my retirement. It seemed like a good idea. The Return on Investment (ROI) was at a 10%+ level then.

Lastly, I knew it might not be so bright, so I also wanted to invest some chunk in the traditional Market (Stocks & Bonds). Mainly to taste it and learn new stuff.

3. My knowledge at the beginning

I hadn’t had any lessons about investment in the school. I was about to have skin in the game to motivate myself to learn stuff, which was a great idea as I read many investment books and earned an MBA afterwards. However, initially, I had only a basic understanding of finance.

I was doing monthly budgeting and had a financial cushion for 12 months of surviving without any income.

Additionally, I knew that by doing this via a limited company and using my own money, they wouldn’t take my private house or don’t put me in prison if I made any mistake. I was only risking losing all my invested money.

I also knew that I wouldn’t be a daily trader, I won’t win with the Market, and that mutual funds were losing money. I perceived ETFs as safer and Forex ‘investing’ as gambling.

Lastly, I knew that having collateral when lending money is a great benefit as you can easier get your money back on the default. When I started, renting generated 4%, Market 5%, and P2P 10%. I didn’t have enough money to buy an apartment, and I didn’t believe I could become financially free quickly using the Market. There was also some opportunity in self-managed pension funds, which seemed like too distant a future to me.

4. Execution

I think the preparation and theory were not so bad. Nevertheless, the execution is the most complex.

I was going to invest in P2P platforms. First, I followed many blogs of people who published monthly performance reports. It was great, as they had been using them for a few years and described which were scams and generated great profit.

Brexit was not a thing then, and EU platforms generated better ROI. I decided to put equally into EU and GB P2P platforms. However, some emotions kicked off. Instead of splitting the money equally, I split it based on sentiment. If my friend told me that platform A is excellent, I put 20% of my wallet there without thinking and checking.

Next, I split the rest of the money into other platforms, more or less evenly.

4.1. Paperwork

Before I could transfer money, I opened a business bank account. When I tried to transfer money to an EU account, it got rejected by all EU platforms, so I had to add another one that was able to pass some EU checks. I had two banks: one for GB and the EU platforms.

Meanwhile, I started registering on P2P platforms. I had to pass their checks for Business accounts (usually more complex than individual), and it was 20+ platforms to do.

Additionally, some work was to do with incorporating and setting up my limited company. I had to find an accountant willing to take my two LTD companies for a reasonable price, and apparently, I had to also apply for an LEI number, as I wanted to invest in Real estate. I learned this as a mandatory step to provide such a number on account activation in one platform. Lastly, I also opened a broker account for the minor part of my portfolio.

To sum up. Having my main work and family, I added a burden of 20 platforms, two banks, one brokerage account, and limited company incorporation to deal with.

4.2. Being Naive

When researching a platform to invest in, I read: “young CEO with very little support at the start keep going and expanding to new countries and regions.” - this was a perfect thing, and I invested there more than in other platforms.

There is a typical scam targeted at senior people in Poland. They are invited to buy pots and duvets, which suppose to improve their health, paying shit loads of money. I would never think that I’m prone to a similar thing. It was enough that I read one small article that a platform X is excellent, to use their referral link (giving them extra profit) to register in the platform. Also, I was amazed that it is so easy and close to real passive income. I used their auto investments - I didn’t have to read to whom I lent my money.

4.3. What happened

Brexit and Covid-19 happened. After Brexit, more paperwork was required, and some platforms were closing my accounts, so I had to rethink my P2P portfolio.

Moreover, Covid-19 started destroying everything. Those young CEOs must quickly learn how to save investors from many defaults, rent holidays, and other extreme situations. This stress test showed me why P2P promised such a high return and how similarly unstable this way of investing was to the early days of the Market in the first half of XX. Some platforms did not survive, and I lost 100% of the money invested there.

In crowd investing, nobody cares about a single person. More prominent companies deal on behalf of investors, and you only vote on things like waiting longer or trying to sell at a loss of 50%.

However, I don’t think that was the most terrible that happened. I had the rest of the portfolio still in play. I reported below the burden of papers on registration and incorporation, which burned countless hours. It didn’t stop with incorporation, so you must pass all quizzes and provide fresher documents periodically (!). I realized I might over diversified. Another thing was controlling. Every month I crawl various interfaces in all my platforms to see how much I earned/lost. It took me about three hours on the performance check once a month.

Lastly, the platforms’ immaturity was in communicating that something wrong was going on. They were very creative in investing mechanisms which won’t trigger all investors to rush for their money. You realized something was wrong only when you tried to withdraw your earnings. The button was not there, or the button was greyed out, or some extra security check was introduced, and you had to contact them with emails, which were ignored, of course.

On top of that, one of my banks realized they didn’t like me anymore and closed my account. 50% of my EU portfolio was left without a bank account - I could not get my money back until I found another bank and convinced an unresponsive platform to change my bank.

5. Lesson learned

5.1. Observation 1 - Diversification is not free

With diversification comes not only cost in fees but cost in keeping an eye on your different investments and fighting with regulator requirements: providing countless papers, proving that you’re not an elephant. You will look into various frameworks and UIs. It will take your time and brain power to learn how to use it, they will update, and you’ll have to learn again. Different players will acquire them, and your learning and paperwork will start again.

5.2. Observation 2 - Liquidity is the ability to walk away from the table

I realized the Stock Market is more mature and better. I learned how difficult it was to quit all my investments in various platforms, mainly via the auto-invest feature. Even though I set them to be 1yr max in length, I found out I have some lendings which end in 5yr. How do I prove I was selecting 1yr in auto-invest? Did I accept some T&C which says they are not responsible for bugs in auto-invest?

Secondary Market in those P2P platforms is a way to quit with some discount. But, not all P2Ps have it. Some of them paused during extreme market conditions.

It’s essential to realize what walking away from 20+ platforms looks like. Every month I login and transfer all my money to my bank account. And now a scary thing, some platforms to survive introduced some rules which increase your loss: a version without one investment per month triggers a fee, or fee on every withdrawal, or a certified (3-month old max) document to prove you are a real company (sometimes in those platforms I have only hundreds of pounds left, which make the certification process more expensive than writing off the money).

5.3. Observation 3 - Regulators don’t play in your team

I always thought regulators catch the big cheaters. Unfortunately, I believe now they protect the big fish more than small companies. It’s like the GDPR rules in the EU, which are against small companies and individuals, then large corporations with unlimited funds, which easily bypass the cookies limitation. Similarly, in investing, a small company does not have money to hire a professional CFO, accountant, lawyer etc. Small companies which want to invest have to go through lots of things to make the regulator happy, which takes a lot of time. Quite visible when you’re making business investments as a sole person.

5.4. Observation 4 - Collateral in crowdfunding is not enough to check

You’re among thousands of investors investing in one thing. Your vote means nothing, and big companies who come to help you offer to re-buy your defaulted investment for peanuts. Even if there were collaterals, you wouldn’t be able to use them to the same degree as when you own an investment entirely.

6. Summary

I don’t regret it, and I am sure I will learn much more soon. I did not close my LTD company. On the contrary, learning lessons will let me discover new things and know new game elements. I’m pretty sure eventually, I’ll get my financial freedom.