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- 🚫 Avoid Investment Scams With These 7 Steps 💡
🚫 Avoid Investment Scams With These 7 Steps 💡
Unbroken Investing
May 11, 2024 • Estimated Reading Time: 7 minutes
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Here’s How The Market Has Been Performing*
Name | Current Value | 1 Week Return | 1 Month Return | 1 Year Return |
|---|---|---|---|---|
DJIA | $39512.84 | 2.16% | 2.73% | 17.83% |
S&P 500 | $5222.68 | 1.85% | 1.20% | 26.22% |
NASDAQ | $16,340.87 | 1.14% | 1.05% | 32.78% |
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*As of Close of Current Market Week
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Name | 1 Month Return | Monthly Average Return |
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Fund 1 | 3.04% | 12.62% |
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Unbroken Insights
Avoid Investment Scams With These 7 Steps
There are risks with any investment. Some risks are tied to economy volatility, such as market corrections, recessions, and inflation. Other risks are due to the inability to perform as promised. Someone persuades you to buy a bushel of apples and promises he can sell them in a day, but he only sells 75% of them. He overpromised, but it happens.
The biggest risk is when the person or entity you are considering is an absolute scam and has no intention of doing anything other than taking your money. How do you identify and avoid those? Here are seven of the top items on our Due Diligence Checklist. This does not guarantee you will avoid every single scam, but it sure does eliminate a lot of them.
Research the entity and people. Working with a well-known entity (such as Fidelity) is a good start but a) some of my best returns have come from less common entities, and b) Enron was a well-known entity. The point is…being known does not guarantee your investment security. You should have a name and physical address of the person (CEO, sales rep, etc.) you are working with. You should be able to confirm their address is legitimate.
Research the location of the opportunity. The location of the office is important—it is much harder for them to hide from consequences if they know they can be found. Therefore, having the physical address of a person or entity increases the likelihood of them performing responsibly. The location also helps identify who can hold them responsible. Most major countries (including the US) could hold a fraudster responsible for his actions. However, if they are located in Russia, Nigeria, or a variety of other locations, this is a red flag that you may not be able to hold them accountable. If a fraudster does not want to get caught, where do you think they would locate themselves? Someplace that will not hold them accountable.
Putting the first two together, I went to Thailand to research my mango investment. I confirmed the CEO online and in person when we met in Bangkok at the home office. We went a couple hours outside of the city two days in a row to see two different mango farms. I met the farm managers and some of the workers in the field. Researching the entity, the people, and the location goes a long way towards avoiding scams.
Use experts during the transaction. When I invest in rental properties, I use a title company to protect the transaction. When necessary, I also use a property manager to verify that the rent rates claimed by the seller are accurate and can be achieved.
Get the numbers. With every investment, you need to know what your return will be. That is often the net income (revenue minus expenses). What are those numbers? Can you get historical ACTUAL numbers or are they hypothetical (hopeful) numbers? Either way, what proof is provided that these numbers are accurate? Can they provide audited account statements, bank account screen shots, something?
Know the industry. I am not saying you need to be an expert in every industry you invest. However, it is good to know what is reasonable for that industry and what is normal or too good. For example, I have a couple investments in the Forex market that consistently make 10% a month. In the Forex market, that is not unusual. If someone were to tell me they have a stock that consistently pays 10% a month, I would know they are not being truthful (to put it nicely).
Get references you can verify. A quote on a website is nice. That could be made up. A client video is even better, but that could be his brother. Try to get a reference to a client who has been with the opportunity for a while and will answer a few questions. If the client says everything is perfect and flawless, that is a bigger red flag than an investor who says, “Hey they had an issue pop up six months ago, but they fixed it quickly.”
Check the paperwork. I have had several deals get through every other step in the process and fall apart when it came time for paperwork. This was usually the result of one of the following:
Vague: ”We provide services and you make money” is not a contract. The devil is in the details and the contract should specify the details.
One-sided: One of the opportunities I looked at recently was fantastic until they sent the contract for me to sign and it was the most one-sided contract I have ever seen. Would you sign a contract that pretty much says, “We have absolutely no responsibility to perform our job well, but you cannot take any legal action against us.”?
Contradictory: The contract could contradict what the “salesperson” told you (common) or it could even contradict itself (rare, but it happens). Salesman: “Oh yeah…if you are not happy after 90 days you can get your money back and walk away.” Contract: “There is no refund under any circumstances.” Which are you going to believe? More importantly, if the salesperson misrepresented that, what else did they misrepresent?
Unprofessional: I am not referring to a contract written in crayon (although that would be a red flag 🙃), but I am talking about things like misspellings or improper grammar. This may sound trivial, but it is an indicator of something else…do they pay attention to details? If someone is not good with handling details, is that who you want handling your investment?
As mentioned, this is not designed to be a comprehensive list of everything that could go wrong with an investment NOR is it designed to guarantee your results if something checks all the boxes (again…Enron). It is just something we have been using to avoid a lot of scams and questionable projects that are out there. Hopefully, it helps you, too.