There’s a sucker born every minute – Investment fraud

Whether it was or wasn’t nineteenth century entertainer PT Barnum who coined the actual phrase, it certainly sums up the sad fact that trickery and fraud was, and unfortunately remains a trap which ensnares investors across the spectrum from gullible to sophisticated.  Investment fraud in my opinion is not only presenting outright falsehoods to milk people from their hard-earned savings.  It also includes presenting information in a deceptive manner where investors are deceived into believing the information being presented is truthful and objective, when in fact it often mixes in half-truths, presented by unobjective, often ignorant marketers and investment sponsors.  Unfortunately, the list of recent investment failures, both locally in Beit Shemesh, and throughout the country, is way too long as each failure often traps tens or hundreds of investors causing losses of millions and millions of shekels. 

As part of the work we perform for our clients, we often evaluate new investments and their sponsors and it pains me greatly to see and hear what is being marketed and how problematically they are being presented.  Just recently another case of alleged fraud in Israel involving NIS 300-600 million shekels came to light along with the heartbreaking stories of hundreds of investors who lost inheritances, pensions, and their life savings to an investment which seems in retrospect to have been farcical   So how do people fall for it?  The short answer for many is due to the lack of basic understanding of how investing works, and critical telltale signs to look out for. So how can we tell when an investment opportunity is ‘kosher’ as opposed to some sophisticated ponzi or similar type scheme? The following points are a starter’s guide for what to look for in a safe investment.

Bright red warning flags

Before you spend any substantial time considering a financial opportunity, be aware of the following huge warning signs and distance yourself from investments with any of these  flashing Be very skeptical if the deal comes to your attention via a cold call, email or letter.

  • Don’t trust anyone who guarantees high returns in a short period of time.  There is no free lunch in investing.  High returns can be attained but not with guarantees and not without taking significant risk.
  • Be wary of anyone with inside information trying to use their advantage for gain.  Not only can it be illegal, but often it is just a tactic to entice you to invest.
  • Think twice and three times before investing in a non-regulated investment.  There are good reasons why investments marketed to the public need to follow regulations, disclosures and reporting requirements.  Non-accredited investors (those with less assets and income and thus presumably less resources and sophistication to evaluate investments) have access to a wide range of investments with higher possible rates of return and risk levels.  But the average person should only consider a non-regulated investment if they understand the true risks and are willing to lose their money.
  • Keep away from anyone who encourages you to borrow money to invest, or to falsify information.  Whereas this seems intuitive it is nevertheless critical to remember.
  • The salesperson’s reaction to your due diligence questions can be an important clue.  Too hot or cold responses can be used to turn the investment decision into an emotional decision alone.  As much as possible take emotions like greed and fear (FOMO) out of your decision-making process.
  • Don’t be convinced by sales patter and promises of riches. If you are responding emotionally, chances are that your common sense is taking a back seat instead of being at the forefront of your investing decisions.

If you feel that no major red flags have been raised, you can then start investing time and energy into investigating the opportunity.

Before committing to any financial deal:

  • Make sure that you evaluate the investment from different angles. Even if it is a close family member or a friend who is offering the opportunity, do your due diligence – either by yourself or pay someone to do it for you. Verify any claims with an independent third party.  Use the internet to research investment marketers and their products.
  • Make sure you understand all the obfuscation and jargon that you will have been bombarded with. People often use long words to sound impressive in the hope the target won’t want to seem unintelligent by questioning. Don’t be concerned about how you may seem to others – it’s your money that you are safeguarding.
  • Look for transparency within the deal. Manipulative sales processes often hide crucial information. Be skeptical, question and re-question. In-depth due diligence guidance is beyond the scope of this article, but basic due diligence questions include:
    • What are the expected investment return characteristics?
    • What is the investment risk profile?
    • How realistic is the expected return?
    • What are the risks?
    • How do I lose money with the investment?  There is no such thing as a guaranteed investment.
    • What are the assumptions and drivers behind the expected return?
    • What is my exit strategy?
    • Does this investment make good business sense?
    • What is the background and history of each principal involved?  Do they have the experience to resolve issues that will arise?

It may be a good opportunity, but is it right for you now?

Once you have satisfied yourself that the investment is a sound one, you still need to analyze whether or not it is the right investment for you, at this particular point in time. Ask yourself how the investment fits into your financial plan.  Will your funds be available when you need them?  Does the timeline for the investment return suit your short/medium and/or long-term goals?  Can you afford the level of risk that this investment entails? The tax consequences of the investment must also be factored in to your decision.  Don’t let your emotions replace your common sense when deciding whether to proceed.  It is far, far better to err on the side of caution than risk losing your savings.  Caveat emptor – Buyer beware.   Critical thinking is crucial as you go through the investment decision process.  Remember that everyone has a bias, and investment marketers and sponsors are no different to any other salesperson trying to convince you to buy something. 

Chasing high returns in a low-risk environment is very challenging.  Think critically about what is appropriate for you and your family and only invest where you can truly understand the risks involved.   It’s no laughing matter to lose a large sum of money, but everyone can protect themselves from that devastating outcome by ensuring that their dreams of getting rich quickly are not just someone else’s get-rich scheme.  Behatzlacha!