P.T. Barnum was right. There
is a sucker born every minute. There seems to be an endless supply of
greedy people who can be duped into participating in some kind of crime
as a way to make easy money. The suckers are willing to believe they
have stumbled onto some great fortune by having the opportunity to
participate in a hush-hush opportunity for quick and easy money. People
with a low self esteem are easy marks for the hustlers who flatter them.
True believers buy into deals offered by con artists who masquerade as
"brothers", as fellow born again Christians or as supporters of some
common cause. Those who are angry at government are easy pickin's for
the hustler who offers them a way to stop paying taxes.
For those who are prone
to being the meal tickets of the hustlers of the world, these common
sense tips will most likely be like water falling over a teflon surface.
They won't stick. But perhaps there will be a few people who might be
"on the fence" regarding some enticing opportunity and these tips may
help them to see that an "opportunity" is either a scam or it should be
A lot of the suggestions
that follow can be summed up in one caveat. "Take your time." The
con artist and the hustler is nearly always in a hurry. They want your
money now, not in a year or two.
Back on Mouth Watering Easy Profits
It's been said that you
can't con an honest person. An honest person is someone who doesn't
expect to get something for nothing or even to get a huge profit for a
small effort. Whenever anyone appeals to your greed to make some easy
money with claims of no risk, that should ring loud alarm bells in your
The best real
opportunities are those that require hard work, significant risk and a
lot of time to develop. Easy money, quick money or a way to get away
with some "innocent' scheme against the government or an insurance
company are all signs of a con.
If you become a "victim"
of a con that involves a crime against some government, a large
corporation or even an industry (like the insurance industry), you will
fully deserve the losses you will sustain.
Reasonable Return on Investment?
During periods of low
inflation, when interest rates are also low, a lot of retirees are easy
marks for those who make preposterous claims of high rates of return on
some kind of investment. If you were to study the movement of interest
rates in relation to inflation rates over a period of a hundred years,
you would discover that when inflation rates are near to zero, interest
rates are greatly reduced.
Without inflation, long
term government bonds (over ten years) will yield about 1.5% to 2% per
year. Bank savings accounts and money market funds will offer similar
rates. Most corporate bonds will yield 1/2% to 1% higher depending on
the quality of the bonds. Tax exempt state and municipal bonds will
offer rates that may even be a 1/2% lower. The interest rate on quality
residential mortgage loans will be from 3.5% to 4% during periods of
very low or zero inflation. During periods of very low inflation, the
stock market usually does very well -- with average returns of from 6%
to 10% per year -- but those rates of return are averages and some
stocks won't do that well. Utility stocks may offer returns of about 4%
to 5% a year during periods of low inflation.
Large corporations rarely
make as much profit as many people seem to think they do. An after tax
return on investment for a mature publicly held corporation is likely to
range from 5% to 10% a year. Any business that makes more than 10% a
year on its invested capital will soon begin to attract competition.
Credit card companies may charge up to 20% a year for interest on unpaid
account balances, but they also have a lot of losses. That 20% is their
gross income, not their net income after taxes.
Based on these averages
as benchmarks, it's hard to understand why anyone would seriously expect
to make a return of 10% or more per month on any kind of
investment! Yet people will invest in schemes that promise returns of
50% a month and will argue that there is nothing wrong with this
"investment". But if pressed, few of them ever get to see any spendable
cash because their "returns" are always reinvested. In many cases, they
are constantly encouraged to put more money into their extremely
Any investment that
requires little or no time and effort and that offers returns far in
excess of what the large corporations are able to make is highly suspect
and should be approached with great caution and care.
Run for an
Exit if You Have To Decide in Hurry
A con artist is always in
a hurry. These are people who don't have the patience to work for an
honest living. Many con artists are very bright, and very charming. They
could make a good living doing something that is useful to other
people. But a lot of hustlers do what they do for the risk and the ego
gratification of being able to outsmart others. As Joe Henderson put, it
"The thing about a con man is, he'd rather
make a little money dishonestly than make a lot of money doing honest
work." (Rips-Offs, Cons & Swindles, M.
The swindler wants you to
make a decision NOW and to write a check or get some cash from the bank
-- all for a very plausible reason. After all, if the reason for the
urgency isn't persuasive, the con won't work. If it's a con, you will be
pressured to make an immediate decision.
If there is a genuine
opportunity that requires fast action, here's a rule of thumb. If you
discover the opportunity, take your best shot. If someone else discovers
it and wants to give you a "piece of the action", take your time and
check it out. Don't do anything in a hurry unless it's something about
which you are a genuine expert and you don't need anyone else to tell
what to do or when to do it.
Hang up the
Phone if They Won't Put in in Writing
Nearly every kind of con
can be killed by insisting that it be put in writing with the help of an
independent lawyer. An independent lawyer is one who is only beholden
to you and who doesn't even know the party who trying to offer you some
kind of opportunity. The mere suggestion of using your own lawyer is
certain to generate a host of reasons why there isn't enough time, why
the deal must be kept a secret, why it will save time and money to use
their lawyer who is already familiar with the deal, etc. etc.
"Opportunity" May Be A Partnership
If you are involved with
anyone else in an effort to make some money, you are probably involved
in a partnership.
Technically, any kind of
business or investment venture between two or more people for the
purpose of making a profit (whether legal or not) is a partnership. It's
not required by law for a partnership to have a partnership agreement
in writing. But it's extremely important to have a clear, written
agreement between all the parties involved as to who will invest how
much and when, how the profits will be divided, how the losses will be
divided, how the assets will be divided if the partnership doesn't work
out, and a variety of other issues such as who will take care of the
In addition, a
partnership is required to file an annual Form 1065 with the IRS to
report the income and assets of the partnership, plus the name, address
and social security number of each partner.
You have every reason to
insist that you and the people who are trying to encourage you to
participate in their opportunity should have a written partnership
agreement and that you should choose the lawyer.
References and Check Them Out
If you haven't known
someone for at least five years or haven't had any social or business
contact with them previously, you have every reason to insist on getting
complete information about them and on getting references. What you
really want is their name, address and phone number. If you can get a
drivers license number that will help. Then contact a lawyer or private
investigator and check them out. If they object because they are
insulted that you don't trust them, ask yourself why you should trust
them. Trust is earned through time and relationships. It's not
something you can acquire just by joining a club or a church or because
of a common ethnic background.
Hustlers and can artists
have a talent for gettiing people to trust them in a very short time.
Without that talent, they would not be able to prosper in their illicit
trade. The flip side of that issue is that if you feel some relative
stranger is someone you can trust completely, and if this person is
offering you an opportunity to make a lot of money, with limited risk,
there's a good chance this new person in your life is setting you up for
some kind of a sting.
If you Have
to Commit a Crime, It's Sure to be a Scam
For decades, some
Nigerians have been promoting a scam that seeks to recruit the help of
someone to commit a crime against the government of Nigeria. The mark
(potential victim) receives a letter from someone in Nigeria claiming to
be an official of some kind who has stumbled onto a huge amount of
money ($20 million or more) that is only available to be used to
purchase certain kinds of goods from foreign vendors. They entice you to
pretend to be such a vendor and they offer to share the loot with you.
If you fall for the scam, they will ask you to put up some earnest
money (for some plausible reason) or they will ask you to travel to
Nigeria -- with some money. Either way, they get the money and you get
nothing. You are not likely to complain either because you were part of
a conspiracy to commit a crime against the government of Nigeria.
In a similar vein, some
promoters in the Bahamas convinced a medical doctor that he could make
some tax free money by putting it into a Bahamas corporation which they
would manage on his behalf. Within six months, they had consumed most of
the money in his corporation on various expenses. When he complained,
they threatened to turn him into the U.S. IRS for tax evasion.
Any plan or arrangement
that requires secrecy or that seeks to take advantage of some large and
impersonal institution -- like the government, an insurance company or
some other large company -- is highly likely to be a crime. However the
scheme is promoted, you will be required to put up some "good faith"
money -- or to invest a share of the total -- but the hustlers will have
control of the money.
"Opportunity" Really Make Sense?
Every business and
investment is a gamble of sorts. More accurately, it's a calculated risk
on the part of the entrepreneur or the investor. Based on a knowledge
of the business or the market segment, the serious investor and the
serious entrepreneur conclude that the potential payoff is
significantly greater than the potential loss.
Life is full of real
opportunities. Clever and hard working entrepreneurs turn such
opportunities into profitable businesses. Clever and hard working
investment speculators sometimes make large profits from such
opportunities -- but they often have large losses as well. Sometime a
doctor, lawyer or other high income professional will gamble a small
amount of money on a new business venture with someone who is a close
friend or relative and will make a huge amount of money. On average,
it's likely that for every time this happens, there are another 999
investors who lose their stake in some promising new venture.
At best, these business
ventures are based on some sensible and plausible business plan to take
advantage of some new product or some kind of gap in the marketplace. At
worst, they are the product of a market frenzy (also known as
"bubbles") like the dot-com bubble of the late 1990s.
The famed investor,
Warren Buffet, was reputed to have investigated every potential stock
investment as if he were going to buy the company. That's not practical
for the typical small investor in the stock market, but it's very
appropriate for someone who has been presented with a business
A good business
opportunity doesn't take advantage of anyone else. A good opportunity
provides a benefit to the future customers in the form of a lower price
or a new kind of product or service or a better way of delivering the
product or service. A good investment is based on putting money into
good business opportunities of this kind.
Anything else should be
highly suspect. You might be confronted with a once in a million chance
to get in on the ground floor of a great new business, but the odds are
1,000,000 to 1 this opportunity won't fly.
Just as there are a few
people who will win the lottery, there will be a few people who will
profit from the once in a million opportunity. But everyone else will be
a loser. One winner. 999,999 losers.
Out; Investigate Before You Invest
business opportunities and other kinds of opportunity are likely to cost
you money unless you carefully check them out before you invest. This
is even more true with offshore opportunities.
We have written an
extensive report on how to investigate offshore investment opportunities
and it's on our web site. (Free). It's called "Due Diligence for Offshore Investors".
Most of that information is equally useful for checking out a proposed
Independent Second or Third Opinion
One of the quickest ways
to discourage a hustler is to insist on getting an independent second
opinion. The hustler will most likely insist that the deal is some kind
of "secret" or that they aren't even supposed to have the information
they are sharing with you. Of they may argue that anyone you contact for
a second opinion won't understand the deal. Of course, they imply that
you understand it -- which is highly flattering.
With any legitimate
business opportunity, the other parties to the deal will want you to get
help from your various advisors, such as your lawyer, your tax
accountant, your insurance agent or your financial planner. By contrast,
a scam artist will do everything possible to keep you from asking for
the advice of any profesional advisors.
Your Backup Advisor is Independent of the Deal
Many years ago, an
investor had made a sizable profit from an investment in a company
operated by a very close friend. The profit was $5 million and he was
faced with having to pay a capital gains tax of $2 million. This was
back in the days when tax shelters were still legal. In searching for a
way to avoid the tax, he became acquainted with a stock broker who
promised him there was a way he could avoid the tax. He needed a lawyer,
but had been living out of town, so the broker recommended a lawyer for
him. He also needed an accountant and the broker suggested one. He then
relied on the lawyer and the accountant to give him an independent
opinion about the very complicated tax shelter deal being presented to
him by the broker. Should we be surprised that the lawyer and
accountant suggested that he proceed with the investment? He did and it
cost him $7 million.
When you get a
professional to help you evaluate a proposed business or investment
opportunity, make sure the professional is not in cahoots with the
promoter. Do not look to the sales person or the person who is
encouraging you to make this investment to provide you with referrals to
professionals who can offer independent and objective help. Look
elsewhere for professional help. If you need referrals ask business
associates, relatives, close friends or long time neighbors for help in
finding a professional advisor.
When to Get
Help from an Expert
Unless a business
opportunity involves something about which you are a genuine expert, you
will need someone to help you assess the deal. With a real estate deal,
you need a real estate expert and a lawyer who has experience in the
real estate business as well as a tax accountant with experience in
real estate ventures.
An "expert" is someone
who devotes at least half of their working time to one subject and have
been doing that for at least three years. If your investment involves
banking, get a banking consultant. If it involves oil and gas drilling,
get an oil and gas expert. Et., etc. etc.
Your Advisor is Subject To U.S. Legal Jurisdiction
A lot of people have
gotten seriously burned on a variety of offshore scams. Many of those
scams involve some element of tax evasion. If you rely entirely on a
promoter in a foreign country to inform you about the U.S. tax law,
securities law or money laundering laws, don't expect to get a truthful
or an accurate answer. (You might, but don't expect it.)
First of all, the
promoter is the person who is going to profit if you accept the offer.
So you should not expect that person to say anything that will deter you
from buying his program.
Second, the foreign
promoter is not likely to be well informed on U.S. tax, securities or
other applicable laws. It's hard enough for U.S. professionals to stay
informed on these laws and it's far more difficult for a foreign person
to do so.
But third, and most
important, the foreign promoter or advisor is not subject to U.S. legal
sanctions for such things as conspiracy to defraud the U.S. government,
for attempting to evade money laundering statutes or for U.S. securities
law violations. That's why a number of former U.S. promoters have given
up their citizenship and are now expatriates. By being free of U.S.
legal sanctions, they can encourage U.S. persons to invest in schemes
to evade U.S. taxes.
Be sure your advisors are
going to be in trouble if you get in trouble. And don't get caught in
the kind of trap where the foreign promoter can threaten to turn you in
to the U.S. authorities if you persist in bothering them about the
mis-management of your money.
Limit Your Potential Losses
There's no harm in
gambling a few bucks on a lottery ticket once in a while or playing the
slots with some "extra" money. Sometimes it's not worth the time or the
cost to really investigate some "opportunity" and it may be something
you'd like to try. If the "opportunity" only requires an investment of
pocket change and it's not going to get you into any trouble with the
law (for tax evasion or money laundering or some other law), then ask
yourself if you could afford to lose this money without causing you to
lose any sleep at night. If you can justify the investment as a form of
entertainment, then go ahead and have fun with it.
But don't be like the
investor who risked his entire $7 million estate in order to invest in a
tax shelter to avoid $2 million in taxes. Don't be like the school
teacher and single parent who borrowed $20,000 to invest in an oil and
gas drilling program or the retired school teacher who put $23,000 of
her modest retirement funds into a certificate of deposit with a foreign
bank that wasn't actually a bank.
From an investment
perspective, there are two different kinds of goals. One is to protect
and preserve your savings for some future use. The other is to use your
savings to make as much money as you can.
The serious investor who
seeks to maximize his returns will often follow a theory of investing
known as market timing. This theory proposes that different kinds of
investments move in cycles at different times. When one type of
investment is going up; others are going down. When one type of
investment is going down, others are going up. The "trick" is to move
out of the falling markets and into the rising markets as quickly as you
can. However, even those who claim that this approach is profitable
will admit that it requires constant attention, a detailed knowledge of
the markets and a huge amount of discipline to stick with a system. This
approach to investing is only for those who have the time and the
temperament to devote most of their time to the daily study of the
For those who don't have
the time or the inclination to follow the markets that closely (and to
take a chance on being wrong), there is another theory of investing that
could be called asset diversification. (This approach should not be
confused with the concept of asset allocation, which is somewhat
similar but which is actually a mixture of two different approaches.)
The diversification approach is based on the goal of minimizing losses
and of accepting the principle that no one can consistently predict what
the markets will do. Asset diversification is also based on the fact
that different kinds of investments will go up and down at different
times. To minimize losses, a pre-set percentage of assets are allocated
to various categories such as cash, debt obligations, equity
securities, real estate, natural resources, hard assets and business
ventures. (A detailed discussion of this concept and of how to also
minimize taxes with this approach is available in our subscribers web
site.) Within each category, investments may be further allocated
between domestic and foreign or by industry segment or even between
mature companies and small companies. Some people avoid the hassle of
investing in specific securities and simply invest in a variety of
market indexes. But risk averse investors will set a limit on how much
they will invest with any one company, with any one group of affiliated
companies and in any one kind of asset. That limit is based on how much
they can afford to loose without seriously affecting their investment
goals. For some people, that limit may be 10% of their assets. For
others, it might be 25% or even 33%.
But whatever the limit,
it represents a decision (before investing) not to risk more than that
amount or percentage of assets in any one investment opportunity.
Planning vs. Hot Tip Investing
Investors who get into
the most trouble and lose the most money are those who don't have any
kind of financial road map. Investing for them is a hit or miss
proposition and investments are usually bought on the basis of "hot
tips" gleaned from seminars, newsletters, phone calls from brokers or
information found on the Internet.
Those who get into the
least trouble with bad investments are those who have a financial plan
-- a goal -- and a road map on how to achieve their goal. A financial
plan requires an assessment of where you are (financially) -- which
involves a review of your current assets, debts, income and expenses.
The next step is to define some kind of goal or a combination of goals.
You may want to define a retirement goal in terms of inflation adjusted
income amounts. Another goal may be to provide adequate funds to put
your children through college or through some kind of trade school. Part
of your goal may be to protect your children from having to help you
with long term care expenses in your later years by investing in long
term care insurance. Part of your goal may be to minimize taxes and you
may need some help to find ways to do that.
Those who have a goal and
plan will make investment decisions based on a pre-selected group of
investments that fit a structure that has been designed to achieve their
goals. They have no interest in hot tips, phone calls from brokers or
devious ways to evade taxes. They don't expect to achieve preposterous
rates of return without equally preposterous levels of risk. They
are not enticed by promises of quick and easy profits.
It's like the story of
the turtle and the hare. In the long run, the turtle is far more likely
to get where he is going because he isn't busy chasing after high risk