Line between scams, creative investments getting fuzzy
Questions:
“I am planning to invest my money but I’m not sure where. Currently, I have two things in mind: first, put my money in some kind of pyramiding investment honored by our government, it follows leveraging procedure ‘daw’.”
“I would like to ask your help in protecting the investing public. Two firms are soliciting funds from the public for 'investment' purposes. I'm 95% sure it's a scam because they're guaranteeing 100% profit or double your money in 22 days! It has attracted quite a number of clueless investors. It just started last month in the Philippines and it could be the next ‘Multitel’ of Baladjay fame. But this could be worse because nobody knows who’s behind it. No company, no personality, no office. It just operates online. You give your money to agents who are also investors and will also pass it to their upline, ala networking style.”
These are part of emails sent to this column via email. I have taken out the names of those who sent the emails as well as the institutions that they referred to. Their emails, though, would be forwarded to the proper authorities.
Financial products in general have become increasingly complex through the years. To a large extent, this is a reflection of the needs of the public — both retail and institutional — which is seeking better ways to either use or acquire surplus funds.
Many savers want to get higher returns without taking on substantial risks. Can it be done? With some structuring creativity and risk substitution, new bank products are constantly being churned out by the market, the latest buzz word of which are structured products that are not exactly suited for those who have little cash to spare or the faint-hearted.
However, individuals or institutions do take advantage of savers who are on a fool’s hunt for ‘guaranteed investment opportunities’ that will earn big buckets of cash, quickly. The consequence is that the line between creativity and outright scams has been very difficult to draw. An offer to double your money is no longer a dead give-away for something awry. With the exemption of specific forms of deposits from the final withholding tax, it was possible for banks to provide such schemes under specific realistic conditions. But doing so in less than a month as supposedly suggested by one of the firms cited above? Now that is just suspicious.
So how can one distinguish between a creative solution and a possible scam?
First, there is no substitute to consumer awareness. As a potential investor, making the right choice starts from knowing what your choices are and how one product is different from another. This gives you a sense of what is available in the market and therefore a sense of what is possible. Textbooks tell us that the risk-return investment frontier is the same across investors of different risk preference. This must be true because this frontier merely outlines the realm of the possible in the market, nothing more and nothing less. Anything outside this frontier is either not possible or the best-kept secret. If it’s a secret, shouldn’t you wonder why, if indeed their objective is to be an investment vehicle?
Second, despite the complexities of financial products, they are often imperfect substitutes to each other. A product that simply overwhelms all other products (i.e., very high returns in very short periods at supposedly low or no risk) would be mobbed by market participants. This dominance will force other products an early product death. In that case, there would be no investment frontier to speak of, just this one product that dominates everyone else. If a particularly profitable and fabulous product is “marketed” by word of mouth only, there is something that doesn’t quite add.
Third, talking about adding, some amount of quick calculations here and there never hurts. Just take the 100 percent return in 30 days. Without the compounding complication, that comes out to about 3⅓ percent everyday, weekends included. That rate can compete with the famous “5-6" scheme in the informal market and certainly much, much higher than what bank deposits command or even the government’s own treasury products, whether its 91-day Treasury Bills or 5-year fixed rate Treasury notes (FXTNs). If we are talking about trading in Philippine pesos, that scheme is saying they are guaranteeing that the peso will go worse than P90 per dollar in one month. Are these in the realm of the possible (meaning with one month)? Personally, I would rather spend my money cooking my next meal for my family or going out to the kids’ favorite restaurant.
Fourth, to me it is always telling if these schemes come from institutions with real offices in visible locations. Image is important to a reputable financial institution. In contrast, so-called “boiler rooms” are nothing but a cramped place which you communicate with through their phone lines. Remember those warnings to be cautious about phone calls with messages of accidents of relatives who need quick cash or jewelry? Boiler rooms are the financial scam equivalent.
I don’t really think there are finite rules out there that work all the time because scams are creative enough to go around them. Discretion, it would seem to me, is the best protection.
At the end of the day, scams exist because we are naturally attracted to the possibility of making a “quick buck”. There is any wrong with hoping to be lucky every now and then. But to constantly participate in schemes where the odds are just not realistic, we expose ourselves to the high likelihood of loss. And if we are the lucky one not to be hurt, our mere participation makes it viable for these scams to exist which will surely hurt someone, sometime, somewhere.
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