Be Aware of Scams

The more time I spend on the internet, the more I become aware of the propensity of charlatans to prey upon Christians. First and foremost, please be very wary of anyone pitching you non-traditional investment opportunities. That would be investments outside the normal routes of CDs (or other bank products), stocks, bonds, or other publicly traded securities. For example, con artists may come to you or someone in your church with a great "investment opportunity", "investment fund",  "hedge fund", or "private equity fund" which could actually be just scams targeting the trusting nature of Christians. You can read more about those types of scams here. That being said, there are plenty of legitimate private equity and hedge fund firms in existence. However, the ones that are legitimate are typically going to have been in existence for quite sometime before you ever hear of them. Typically, they won't be targeting individuals with modest savings. In fact, the SEC requires that individual investors in such funds be "qualified" meaning they have an investable net worth of at least $1 million or make at least $200,000 per year income. I suppose the SEC reasons that if you are wealthy, you are also a sophisticated investor, or have attorneys and accountants that will advise you in these sorts of matters, or can afford to take unconventional risks.

Legitimate firms are typically launched by people with significant track records of success in the financial industry. They are typically well connected within circles of wealth and influence, and are able to raise hundreds of millions of dollars at the outset. Typically, you won't see legitimate money managers networking with average folks for the purpose of asking a large number of individuals they've never met for relatively small amounts of money (in the thousands) for investment funds in order to get started. However, scam artists will do exactly that, and they are pretty good at gaining people's trust, giving off the appearance of complex, secret, or "little known" investment strategies, and even giving the appearance of already having wealth. Of course you can use the rule that if something sounds too good to be true, it probably is. However, a good con artist is going to be aware of your knowledge level and tailor his pitch appropriately. He or she may promise only slightly better returns than what you can expect to achieve with publicly traded securities in order to hook you. There are legitimate opportunities for investment outside of publicly traded securities, such as real estate, private loans, tax certificates, or investments in small business. However, these typically require a lot of specialized knowledge, a lot of work, and the acceptance of different types of risk than you will find in traditional investment products. If you are looking at any sort of private investment opportunity, just realize that a legitimate and morally sound firm or business person will welcome any and all efforts at transparency and due diligence.

Before I handed over my hard-earned money, I would find out everything I possibly could about an investment manager, his background, the proposed strategy, the specific investments he plans to make, if leverage is involved, the other types of risks involved, where the assets will be held, if there is a professional accounting firm auditing his statements and purported returns, etc. Beyond that, you would certainly need reputable, independent attorneys and accountants to review such an opportunity before investing. If you can't afford them, then you can't afford to lose money anyway, so what in the heck are you doing?

Recently, I was browsing through commercial real estate listings. I came across advertising for an "investment opportunity" in condo hotel units. They were advertising very high expected returns and urging "investors" to hurry! If someone tells you that you need to "hurry" and make a decision before the opportunity passes, by all means, let it pass. Don't let some huckster con you out of your hard earned money by inflaming your sense of greed. By the way, lest I come across as holier than thou, we are all susceptible to greed. Like any other temptation, we have to fight against it. The best strategy for dealing with greed is to wait. Just wait. Sound investment strategies and opportunities don't disappear overnight. They will be there well after you have taken plenty of time to employ sober judgment, wisdom, and due diligence to the matter.

Next, be wary of any complex investment strategies, vague marketing pitches regarding little known information, or alluding to excessive returns, especially those found on the internet and in newsletters. Even if you aren't handing your investment dollars to them, you could still lose money by following bad advice. Be especially wary of any that involve foreign currency trading. This is an area which is popular lately among con artists, mainly because it still has an aura of mystery to the average retail investor. I guess the high volatility and leverage available in those markets can easily inflame people's sense of greed. Some specific examples of these scams are listed here.

To be clear, there are plenty of both good and bad operators on the internet and in financial newsletters. Let common sense be your guide. Pay close attention to how a strategy or product is marketed to you. For example, I recently saw an internet video pitching an investment newsletter. The person in the video claimed to be a Christian, but used what I consider to be very sneaky, deceptive, and otherwise unethical marketing techniques, in addition to some exorbitant claims about past investment results and the number of subscribers the newsletter supposedly already has. In my opinion, his pitch was also designed to inflame a sense of greed in the viewer, even while claiming the opposite. It's my belief that this video was designed to effectively say to people, "You can be rich like me, by accessing this secret biblical knowledge I have found." I have no idea what the actual product looks like, because I figured out everything I needed to know about these people by watching the video. Now, all of that is my opinion of what I saw, and everyone has their own opinion. The point is to be aware that we must test the spirits of those who come claiming to be brothers and sisters. If anything in your spirit is alerting you that something is wrong, it probably is.

Last, be aware of another common area for investment scams: penny stocks. If you're considering buying a penny stock based on some "analysis" or pitch you saw on the internet or elsewhere, you're probably letting greed cloud your good judgment. Maybe you are someone who sees them for what they are, and just wants to take a gamble. I confess to having done that (not with penny stocks, but risky stocks nonetheless) in the past with small amounts of money. Now, I realize that it is foolish to gamble with any amount of money. Just realize that there are tons of marketing efforts pursued by very small publicly traded companies in order to temporarily inflate the price of their stock. They do this in order to 1) issue more shares at the inflated price or 2) sell personal holdings for substantial gains.

Oftentimes there will be press releases by the company itself, or "newsletters" and articles on the web, the writer of which is paid by the company to write a favorable opinion on the company and stock. So, they are basically paid advertisements which are made to appear as thoughtful, independent analysis, though legally, any payment for such writing is supposed to be disclosed. These pitches can sound convincing to the untrained eye. As always, don't let your sense of greed drive you to do something foolish. It may be tempting to try to play the game along with the perpetrators of such scams. Not only is that unethical, in my opinion, it is also very risky. Knowing when to get in and out of such a trade could prove very tricky. Here is a good resource to check out these types of stocks in advance:

http://www.pumpsanddumps.com/

In general, investing is like everything else in life. If you work hard at doing it well, it will pay off, especially over long periods of time. The longer the time period, and the harder you work at it, the more you can expect it to pay off. Can you get wealthy from investing in publicly traded securities? Absolutely. Is it quick and easy? 99 times out of 100, it isn't. If you put most or all of your eggs in one risky basket, then fate smiles upon you, and you generate excess returns that leave you wealthy in short order, congratulations. You've managed to accomplish a feat that thousands and thousands of some of the most intelligent people in the world have not managed to accomplish. Take your wealth, put it into a well diversified portfolio of relatively low risk securities, and kick back on a beach somewhere. Because, I can almost guarantee that you won't repeat your past success. Neither will you be able to help others achieve the same success. So, don't be tempted to sell people promises on which you cannot deliver. What's more likely for the types of scams I mention, are that these people never experienced such returns in the first place. Instead, they realized that the real money was in getting people to fall victim to greed, by believing that they could generate such returns.

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