Investment scams are on the rise.
In Singapore, the number of investment scam cases shot up to 1,102 last year, a 126% increase from the year before. As a result, victims lost at least S$69.5 million.
Recently, media reports suggest that investors in an alleged billion-dollar nickel trading scam were not likely to get their money back.
Stories like these won’t be going away soon. Investment scams tap into the greed and naivety of humans. They prey on the ego and pride of people who think they are smarter than others. They work on lazy investors who want to get rich the fast and easy way.
Also, investment scams come in all sorts of schemes. Some are short-term, just a few months, and some are long-term, a few decades in the Madoff case.
Still, one can guard against an investment scam. Here’s what to look out for:
- If it’s too good to be true, it usually is. There is no free lunch. If promised returns are above 15% annually, the risks must be higher than that.
- Understand how an investment scheme derives its returns. An investment is not a computer game. Financial derivatives are potential weapons of mass destruction. So is leverage. Investing is not picking an industry that you think will do well tomorrow, say electric vehicles or spacecraft.
- Entry and exit clauses. Some investment schemes have easy to enter and difficult to exit clauses. For example, if a scheme restricts you to exit with a maximum of 5% of your money a year, you will need 20 years to recover your money in full.
- Buy the manager. Don’t just buy the investment. Educational credentials and market experience are important, but the manager’s integrity is the most essential thing to consider.
- It’s normal for market prices to be volatile. It’s not normal when an investment only goes up or pays an extraordinary fixed dividend in perpetuity.
- Don’t believe every piece of data or article you read, even if it’s backed by a government, Nobel prize winner or global institution. There is no reward without hard work, and you cannot last for the long-term reading secondary research, or worse, learning from YouTube. If you don’t want to do the hard work, find an honest fund manager who does.
- Be careful what you learn and from whom you learn. It’s better to have no financial knowledge than to have wrong or crooked financial knowledge. There are only a few financial theories that are true. The rest are marketing gimmicks.
- Always challenge and question the manager. Sometimes, the manager starts out with good intentions but loses their way after a few years. Remember Madoff? Other times, the manager can themselves be a victim of an investment scam. After all, managers also make mistakes.
In short, getting rich from investing is not about outsmarting the rest of the market but rather putting in the hours and doing some solid research.