THERE'S rarely an evening that ‘the next new investment idea’ doesn’t interrupt my relaxing pint in the bar.
It is in those moments where an investor’s confirmation bias can lead them to considerable loss. Questions like ‘but don’t you think?’ serve only to confirm what they already believe, but are tantamount to poor decision making.
Perhaps the greatest investment-making decision flaw of all, is the self-inflicted psychological torture of FOLO - the fear of losing out. More often than not, the loss or gain is actually imagined, but that drive leads 250 people per day to fall foul of investment scammers.
With interest on investments at near zero, inflation eroding your capital, and austerity measures trashing your standards of living, it’s easy to see how investors can be tempted.
Investments scams are a pretty easy spot (after the event) but think of those investors who suffered in the hands of the famous scams such as Bernie Madoff’s $65 billion loss for investors in his pyramid scheme. How could so many have been fooled, especially when the clue was in his name - ‘Made Off’?
Others have been duped, or purchased shares in falsified companies, with Enron’s founder losing $74 billion, and Bernard Ebbers topping the tree with a staggering $100 billion loss at Worldcom. Ebbers, like the others, simply exaggerated the company’s assets and sure enough when the sweetie jar was opened, there were no sweets and the shares plummeted from $64 to $1.
Whilst a smaller loss, Jordan Belfort of the “Wolf of Wall Street” fame, lost investors over $200 million but with a simple strategy.
He simply had cold callers ring to sell shares to unsuspecting investors, massaging their egos by saying they were selected as savvy investors. Then, having bought these shares himself at the lowest price, he would dump them, trotting off with the gain and plummeting the price.
All he needed was ambitious, fresh suited brokers who didn’t question coupled with unsuspecting hubristic investors, and he was in business.
You’ll now see the convicted fraudster is advising that Bitcoin might hit $50,000 before crashing. Of course those investing at $8,000 could therefore believe an exit at $40,000 is a real possibility – the lure.
Moreover, he produces a video on ‘as promised, my views on Bitcoin’ after which over 7,000 people gave it the thumbs up and 3700 people shared. Long sigh….History doesn’t repeat itself but it often rhymes.
The Financial Conduct Authority (FCA) protects investors by regulating those who give advice and the products they offer, as well as the companies who create such products.
Within those boundaries you have protection and outside of them you are potentially toast. Current scams to consider are in abundance such as many crypto currency schemes, cloned firms, overpriced share schemes and binary option schemes.
I was invited to look at a crypto-currency presentation and stopped making notes after 15 minutes of twaddle and sharp suits.
At the end, people were asking if I was going to ‘invest’ and I asked if they had received enough information to do so. Shoulders shrugged. I referred them to a column they were using as evidence in their presentation which promoted the crypto-currency and asked if it looked suspicious.
‘No’ they said with a frown. And that’s confirmation bias. The column had clearly been written by the crypto coin company and placed on a very average US website. I was looked on as a naysayer.
Bitcoin connect investors (it had a market cap of $2.6 billion at its peak) who thought they were on to a winner with one of the best performing ‘currencies’ of 2017, will have learned a very sad lesson on how to be tricked and re-tricked, with a fall of over 96 per cent.
‘Cloned firms’ copy a financial adviser’s website and name, then put a different telephone number on to it to sell you whatever they wish.
‘Binary schemes’, which are one of the biggest frauds in the UK at the moment, allow you to bet on the expected price of a stock, currency or financial index, and when you come to access your ‘returns’ you are denied access.
Space prohibits covering all scams but start with either a search of the warning list contained on ‘ScamSmart’ section of the FCA’s website or visit the “ActionFraud” website.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.
