Tuesday, July 5, 2022
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How To Avoid Investment Scams

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Back in 2015, while travelling, we went to the Canadian Consulate in Chiang Mai, Thailand to request some tax documents for our first book.

There, we met another Canadian, who was trying to convince the Canadian consulate to fly him home for free because he’d run out of money. Let’s call him “Nick”. Nick, as it turns out, was in a dire situation because after selling a multi-million dollar company, he’d bet hard on a second start-up, which was hemorrhaging money and was in Thailand with his Thai wife, hiding from his creditors.

He started chatting us up, saying how we had this inexplicable “happy glow” and wanted to know what our secret was. Luckily, we hadn’t started this blog or written Quit Like a Millionaire yet, so all he knew about us was that we were software engineers taking a gap year to travel the world.

He was charismatic and interesting enough that we got along well and went out to dinner a few times (he, somehow, still found enough money to eat out). He showed us videos of his business partner on Shark Tank, talked about how he was featured on “Forbes 40 under 40” and at one point was worth 20 million dollars. And then just one week after telling the Canadian consulate he was broke, he allegedly made some “calls”, and found some angel investors to invest in his new business idea and was now suddenly flush with cash (which he proved to us by opening his wallet and showing us a thick stack of bills, totalling 35,000 Baht, the equivalent of $1000 USD).

Just as I wondering what is up with this guy, he started pitching to us about a “once in a lifetime” business opportunity, where we would code his new app idea and sign on to a contract to work with him for a year, and he would pay us in company shares, after it “goes gang busters”. Apparently, he’d already sold this idea to his investors in Silicon Valley and they were eager to get started. All he needed was to get us on board to code it.

The catch, was that we had to sign the contract in order for him to tell us the idea because he “didn’t want it stolen”. I was straining so hard not to roll my eyes I gave myself a headache. So, basically, Nick wanted us to do the coding for free, and would only tell us what we were working on AFTER we signed a contract with him.

Sounds legit.

Clearly, I wanted to be a part of that deal as badly as I wanted a traumatic brain injury. Plus, who flashes $1000 USD worth of cash in public in a foreign country? This whole thing had more red flags than all of China.

Needless to say, I rejected Nick’s offer and his promises of fame and fortune. He implied I was being “too negative” and was “holding my husband back”. Then he walked away, shaking his head and muttering “f*cking engineers. So damn skeptical.”

This is the memory I flash back to whenever anyone tries to get me to invest in crypto or NFTs.

And I’m not alone. At the recent annual Berkshire Hathaway shareholders meeting, Warren Buffett gave the best explanation on why he won’t buy bitcoin:

If you said … for a 1 per cent interest in all the farmland in the United States, pay our group $25 billion, I’ll write you a cheque this afternoon.

For $25 billion I now own 1 per cent of the farmland. If you offer me 1 per cent of all the apartment houses in the country and you want another $25 billion ($A35 billion), I’ll write you a cheque, it’s very simple…The apartments are going to produce rent and the farms are going to produce food.

If you … owned all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it. Because what would I do with it? I’ll have to sell it back to you one way or another. It isn’t going to do anything.

Ouch! I hope they make aloe vera for bitcoin, because it just got BURNED.

Whether it goes up or down in the next year or five years or 10 years, I don’t know. But one thing I’m sure of is that it doesn’t multiply, it doesn’t produce anything. It’s got a magic to it, and people have attached magic to lots of things.

–Warren Buffett

The “magic” part is exactly what scared me off Nick’s proposal in Thailand. Don’t work with shady people who are opaque about their intensions, and don’t invest in “investments” that grow “magically” without producing anything.

Some people compare bitcoin to digital gold, saying that even if it doesn’t produce anything, as long as the world agrees it has value, it’s worth investing in.

I disagree. If it doesn’t produce anything, it’s not worth investing in. That’s the same reason we don’t own gold. You don’t get any benefits until you sell it and it doesn’t pay you to own it. You have no idea when to sell (what if you sell and it goes up even more? What if it crashes and you don’t get out in time?) and if you hold it forever, you never get paid.

If anyone tries to sell you crypto as the “fast track to riches” don’t believe them. We avoided that trick back in Thailand with Nick because our skeptical engineering brains helped us avoid his scam. It doesn’t matter how much tap dancing and razzle-dazzling he was doing, I wasn’t buying it.

I have no idea where Nick is now. Suffice to say, his business idea didn’t take off because none of the fame and riches he predicted came true.

Be skeptical (think like an engineer), don’t invest in opaque investments, and if it isn’t diversified and doesn’t pay you to own it, it’s not worth owning.

Here’s a few ways you can avoid investment scams:

Is it regulated?

Make sure the platform handling your investments is regulated.

For Canadians, Questrade, the brokerage we use and recommend, is regulated by IIROC (Investment Industry Regulatory Organization of Canada) and CIPF (Canadian Investor Protection Fund). As a result, our assets are protected against brokerage insolvency and/or unauthorized trades.

For Americans, Vanguard is a member of Securities Investor Protection Corporation (SIPC), which protects its customers against brokerage service failure and/or unauthorized trades.

Can you tell what’s in it?

For every ETF we own, we can look at the list of holdings and see exactly which companies we invest in. Here’s the one for VTI. If you’re going to invest, you need to know and understand exactly what you’re investing in.

Does it pay you to own it (without using a Ponzi Scheme)?

A Ponzi Scheme dupes investors into thinking they’re getting a high yield when in reality, it’s simply paying existing investors with new investors’ money. That’s why Ponzi Schemes always needs a stream of new investors to buy into the scam. If no new investors can be found, it falls apart.

Index funds don’t require new investors to continuously buy it in order to pay dividends. The dividends come from distribution of corporate profits.

Don’t buy investments that require you to time the market and find a greater fool to sell to. Make sure you get paid to own it. And that pay should legitimately come from corporate profits or rental income. If an “investment” doesn’t produce anything, be suspicious about where its yield is coming from.

Is it liquid?

Liquidity means how quickly and easily an asset can be bought or sold at market value.

Homes are illiquid, meaning it could take several weeks or months to find a buyer.

VTI, which has an average trading volume of 4,737,027 shares per day, is very liquid. I could sell it within seconds.

When it comes to investments, we don’t buy anything we can’t drop in 30s flat, because when things turn bad, you don’t want your money trapped.

That’s why even with the recent volatility in the markets, I haven’t lost one second of sleep. Our brokerage is regulated, we understand exactly what’s in our portfolio, it’s liquid, diversified, and the passive income it produces, made up of dividends and interest, easily covers our expenses. Not only do I not need to worry about the fluctuation of our net worth, but I can also take advantage of this market dip as a buying opportunity to invest any income we earn from passion projects. As Buffett says, “be greedy when others are fearful.”

How are you currently feeling? Fearful or greedy? Do you have any tips on how to avoid investment scams?

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