Avoiding Fraud

By Andrew

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Bernie Madoff has made fraud and the classic Ponzi scheme front page news and brought those those to the forefront of investors mindsets.  Truth be told, fraud is ever present and Ponzi schemes occur all the time to all kinds of people.  Here are few ideas on how to avoid such schemes and keep your money safe:

If it’s too good to be true…

The old saying, if it sounds too good to be true, it probably is  is a great rule to follow in investing.  Investing takes work, takes patience and takes sound decision making.  When you hear a story about easy money, realize that there is no such thing.  If there was some easy way to double or triple your money, EVERYONE would do it.  There are people that spend their entire careers finding investments, so easy money is rare (because everyone would jump on it, increasing the demand and thereby increasing the price).  Typically in investing (in the stock market), you should expect to double your investment every 10 years.  So when you get advice about doubling your money in 6 months, be wary and investigate very carefully.

My brother knows a guy, a real good guy…

One easy trap is trust.  “I go to church with this guy” or “My brother is a real wizard with money”.  Sounds great, huh?  First find out a few things about people you intend to invest with: Educational background,  investment standards and professional history.  I’ve personally seen people get burned by trusting friends at church, family members and someone that they think is smart or successful.  Just because someone drives a fancy car, it does not make him a great investor or trustworthy.  In fact a person that commits fraud will likely do it again.  Always Google and check those you invest with.

I guarantee it…

Nobody can guarantee a return.  Confidence is one thing.  But if someone guarantees you a return, especially a high return of 10% or more per year, something is fishy.  One classic sign of a Ponzi scheme is consistent returns.  That was a classic of Madoff.  Year after year consistent returns.  That usually signals that profits and returns come from another source (other than actual investing).  Remember, the market typically can double your investments every 10 years, which averages out to 7% per year.  So when someone guarantees 14% annual returns, something is up. Tread carefully.

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About Andrew

Andrew is a corporate finance consultant living in Los Angeles, specializing in distressed and bankrupt consulting. He helps clients review business plans and the general market and decide what steps to take next. He has a masters in finance. Andrew enjoys running and biking in the San Gabriel mountains, cheering for the San Francisco Giants and eating (but trying not to gain weight).

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