Avoiding Con Artists: Some Common Misunderstandings

I’ve written on this topic before, but I want to take a different angle of attack on it tonight.  Before I do, I would like to give links to some of the things I have written on the topic:

Avoiding Con Artists: Some Common Misunderstandings

Okay, enough.  I’m surprised that I have written so much on this topic.  There’s more, but I leave out the marginal stuff.

This article is partially prompted by my review of Octopus.  But it was triggered by my receipt of an e-mail today, that when I clicked on the link, led me to something like this.

Passive income is one of the ways that scammers appeal to the greed of people.  You get money, and you don’t have to work.  But passive income stems from buying or creating something that will have continual demand.  That takes effort or ingenuity at taking risk, and if you are wrong, you could lose a lot of effort and/or capital.

Passive income is easy to achieve.  What is hard is making sure that it continually rises, and that it stays at a high level relative to capital deployed.

With President Obama, his book “The Audacity of Hope” brought him a lot of passive income.  But there was risk involved; who knew that he would be elected President?  Few of us writing books will get so great an audience, and get such a long tail.  Most books are here and gone.  Same for most songs.  Same for most plays, etc.  Royalties are not as easy as they seem.

Most royalties are wasting assets.  Mines get mined out.  Wells go dry.  Things that are published stop selling as much.  In that sense they are worse than bonds, because the yields decrease over time.

So, no, passive income isn’t a solution, and may end up delivering less than conventional investments.

Avoiding Con Artists: Developing a Defensive Mind

I have a saying:

Minds work best when they are like castles, when there is a moat, and defenders at the ready to deal with deceivers with arrows and boiling oil.

Here is my main advice: you need to be skeptical, but not cynical.  Skeptics question, but can be convinced with adequate evidence.  Cynics think the world is rigged.  Here’s their flaw — they can be tricked into scams where they think they are on the rigging side, when they are not.

Here’s my advice to aid your thinking: the world is not rigged.  There are few if any significant conspiracies that deny wealth and power to the masses.  The reality is more banal.  Some people, as a result of their training, networking, and effort do better than others.  Most people don’t put forth sustained, focused, intelligent effort that allows them to accumulate wealth.

Are there some that make money off of government connections?  Yes, but they are not the rule, and they don’t advertise for passive capital.

Passive capital is a highly competitive place to be.  Making money with money is desired by financial institutions, pension plans, endowments, etc.  If there were an easy way to do it, the big guys would have figured it out long before you.

If it seems to good to be true, it probably is

Trite, but true.  Condition your mind to dismiss schemes that cannot fail, investments that are a one way ticket to riches, etc.  Get a sense of the scammer voice, where he invites you into a secret “club.”

Look, if I had a path to easy riches, would I share it?  No.  All riches stem from hard mental or physical work, even if you inherit it.  That is why you have to distrust those who try to scam you through proffering easy riches.  There are no easy riches.

There are no secrets in investing.  Don’t let anyone tell you that they have a secret tactic.  I don’t have a secret tactic.  I do have my own methods, which draw from a lot of well known methods, and my own sense of what works in business, which also stems from well-known ideas.

Avoid anything that makes you think you are in the inner ring — the precious few, who due to connections have been able to escape the ordinary lot of men, because they are part of the club that has the secret, or government connections to a secret program.

If someone has a great opportunity, and need passive capital, they will advertise it boldly, because they want the cheapest cost of capital.  Those that limit the message to a select few are likely scamming.

Final Points on Avoiding Con Artists

Pay attention to auditors and custodians.  They protect you, and they should be high quality, and unaffiliated with the promoter.  Avoid those that do not market broadly — what I mean here is those that don’t go through major brokers.  The more exposure an idea has the more likely it is valid.   That said, highly exposed ideas will likely produce market-like returns.  There is a trade-off here.

Also, all investing involves uncertainty.  Reject those that tell you something is a sure thing.  THERE ARE NO SURE THINGS!

Sigh.  Do I have to go to that level of emotion/energy?  I GUESS I DO! Because the scammers keep coming around and milk the unwary.

PS — I know my readers are smarter than most, but if you have friends or relatives that you think might need this, please forward it on.  Delete this last line to protect their self-esteem.

By David Merkel, CFA of Aleph Blog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.