Poster for The Sting by Richard Amsel. Source: Wikipedia
Investment scams are everywhere. From Ponzi schemes to obscure bank instruments to penny stock pump-and-dump operations, the internet and email seem designed to encourage fraudsters to try to bilk us out of our savings. What are some of the signs that someone is trying to swindle you?
First, check the pitch. What are they appealing to? Is it fear? Greed? Envy? Scam artists usually play to our lower nature. Get-rich-quick schemes appeal to sloth: “Get rich and retire early!” Ponzi schemes offer steady, unsustainable returns—usually in the high double-digits—appealing to greed. Obscure investment instruments give us a window into supposedly secret knowledge—calling on pride. For every human foible, there’s a con that goes with it.
The “Seven Deadly Sins” is a list of vices first compiled in the fourth century, whose sources go back to the Bible and early Greek philosophy. You could run down the list—pride, envy, greed, lust, gluttony, wrath, and sloth—and think of scams associated with each.
Allegorical illustration of the seven deadly sins. Source: Wikipedia
Second, ask yourself, what makes you so special? Why did this investment opportunity come to you? What is your relationship to the investor? This isn’t a sure test; Bernie Madoff knew many of his marks, and stayed in touch with them. But it’s far more likely for us to get bilked by someone we don’t know personally. Con artists know how to present themselves professionally, so we can’t judge a book by its cover—or even the first few pages. Take the time to see what’s inside.
Which brings us to the third test: take some time to examine the opportunity. Good investments—like good investment principles—stick around. Read legal documentation, check references, contact regulatory agencies, and evaluate credentials. Anyone can create a social media profile and put together a slick-looking web site. But it takes a while to establish a track record. Investing isn’t like buying avocados: they’re rarely “available for only a limited-time.”
Finally, examine your personal investment objectives and limitations. Even a legitimate investment vehicle may be inappropriate if it doesn’t fit your needs. For example, there are lots of things that don’t belong in an IRA—the tax treatment and liquidity requirements create specific issues. Similarly, if you need cash from your portfolio, an insurance product—like an annuity—or limited partnership is rarely the way to go.
Investment scams—and the people they target—come in all shapes and sizes. Today’s volatile stock market can be scary. Con artists know this and play to our fears. But there are no secrets in money management. There is no secret club, secret formula, or easy way to wealth. The Book of Proverbs has the final word: “Dishonest money dwindles away; but those who gather money little by little make it grow” (13:11).
Douglas R. Tengdin, CFA
Chief Investment Officer