Why “High Returns” Can Still Destroy Value: The Hidden Math Behind Bad Investments

It is not that the number is fake. It is that the number is incomplete.

A percentage return can be technically true and still hide three uncomfortable realities:

1. how much money you can actually put to work,
2. when you get your money back, and
3. what you are giving up by waiting.

That is how “high returns” can still destroy value.

The first mistake: confusing return with value

Think of return as speed, and value as distance.

A fast car is great, but if it only drives you to the next traffic signal and back, you have not traveled very far.

In investment terms, value is about the size of the benefit after you account for timing. Government analysts use this same logic when they evaluate long-term programs. The U.S. Office of Management and Budget defines net present value as the difference between the discounted present value of benefits and the discounted present value of costs. 

That definition contains the key idea: discounted present value. In plain language, it means money later is worth less than money now, because waiting has a cost.

OMB explains the mechanics in a way that is refreshingly unromantic: a discount factor converts a future year’s benefits or costs into present value terms, and the discount factor equals 1/(1+i)^t, where i is the interest rate and t is the number of years in the future. 

So the “hidden math” is not some secret Wall Street spell. It is simply the time value of money, written down.

The second mistake: ignoring timing (the quiet killer)

Timing is where many “high return” deals fall apart.

Here is the intuition. If you get paid far in the future, you have to discount that future cash. The farther out the cash flow is, the smaller its present value becomes. OMB makes the point directly: to calculate net present value, it is necessary to discount future benefits and costs, and the higher the discount rate, the lower the present value of future cash flows.

This is why two investments can have the same headline return but wildly different real value.

A deal that pays you quickly can be reinvested sooner. A deal that locks you in for years forces you to wait, and that waiting is not free.

The third mistake: chasing IRR without checking what it buys you

Internal rate of return is a useful number, and it is also one of the easiest numbers to abuse.

The government glossary defines IRR cleanly: it is the discount rate that makes the net present value of a project zero, and it can be interpreted as the expected compound annual rate of return earned on a project or investment.

OMB’s Circular A-94 states the same relationship: the internal rate of return is the discount rate that sets the net present value of a program or project to zero.

So yes, IRR is closely tied to NPV. But here is the trap: IRR is a rate, not a pile of money.

A small project can have a dazzling IRR and still add very little value in absolute terms. A large project can have a lower IRR and still create far more value because the cash flows are bigger.

That is why OMB notes that IRR can provide useful information, but it does not generally provide an acceptable decision criterion by itself.

In other words: IRR is a clue, not a verdict.

A quick way to spot “high return, low value” deals

When someone leads with a high return number, ask two follow-ups:

1. “How much can I invest at that return?”
2. “When do I get my money back, and how certain is it?”

If the answers are “not much” and “much later,” you are probably looking at a situation where a high IRR does not translate into meaningful wealth creation.

This comes up in the real world in surprisingly ordinary ways:

• Promotions that require long lock-ins
• Investments with teaser payouts followed by long droughts
• Deals where most of the cash arrives far in the future
• Projects where the “return” assumes reinvesting at the same high rate (often unrealistic)

Even without any fancy spreadsheets, you can already feel the problem: a high percentage return on a small or delayed cash flow is like bragging you ran very fast, but only for three seconds.

Why pros look at both NPV and IRR

Professionals often pair NPV and IRR because they answer different questions:

• NPV asks: “How much value does this create in today’s money?”
• IRR asks: “What annualized rate of return is implied by these cash flows?”

Used together, they reveal whether a project is both efficient and meaningful in scale.

If you want to compare projects more rigorously, evaluating the implied annualized performance with an internal rate of return (IRR) calculator can complement present-value analysis by showing how efficiently capital is being deployed over time.

The key is balance. A high return is attractive only if it translates into significant value creation.

The weird edge case most people never hear about (but should)

There is another reason “high returns” can mislead: sometimes IRR is not even a single number.

OMB explicitly warns that the internal rate of return may have multiple values when the stream of net benefits alternates from negative to positive more than once.

Translation: if cash flows switch signs multiple times (money out, money in, money out again, money in again), the math can produce more than one “IRR.” If someone is selling you a deal with a complicated cash-flow pattern, a single IRR figure may be cherry-picked, or it may be one of several valid solutions.

That is another reason NPV tends to be the steadier anchor: it tells you the value created at a chosen discount rate, even when the cash-flow pattern is messy.

“But what discount rate should I use?”

There is no single universal answer, because the right discount rate depends on context. What matters is that you do not pretend the discount rate is zero.

Government analysts take discount-rate choice seriously because it can change the result. Circular A-94 instructs analysts to discount future benefits and costs and highlights how sensitive net present value is to the discount rate.

OMB also updates certain discount rates annually for specific federal analyses when budget assumptions change, which is another reminder that discounting is not optional and not static.

For an investor, the practical takeaway is simple: pick a discount rate that reflects your opportunity cost and risk, then check whether the investment still creates value under reasonable variations.

If a deal only looks “amazing” under one very specific, very optimistic discount rate, it is not amazing. It is fragile.

The bottom line

High returns do not automatically mean high value.

A high IRR can come from small scale, delayed payouts, or cash flows that look attractive on paper but do not translate into meaningful wealth in your pocket. NPV forces the conversation back to reality: how much value is created today once you account for time.

So the next time you hear “This returns 40 percent,” do not argue. Just smile and ask, “Great. How much value does it create, and when do I actually get paid?”

That single question is where bad investments start to sweat.