Schemes and Scams

I like to write, except when I must.   I didn’t post last week because the muse was not with me.  But now she is back, filling my head with questions about the line that tries to divide sound investments from downright scams.  Often that line is quite clear to many of us.  We can often spot an unsophisticated scam from a mile away.

Sometimes those who should know better get taken.  When a wise investor get had she is only taken for a small percentage.  For example, the collapse of Enron directly impacted my investments… to such a small degree it possibly lost in the round-off error.  VTI for example, because it is a market-weighted index, exposed me to a little bit of Enron.


In principle, regulation exists to combat Enron-style malfeasance.  And it works to a large degree.  However, for individuals and corporations alike, prudence is a perhaps more important factor.  It occurs to to me that it is in my own best interest to periodically remind myself of this fact.

It for this reason that I looked up the classic Ponzi scheme to check my facts:


Then there is the legally grey red/black roulette scheme.  A financial adviser collects 10% return on all investment profits.  He takes the investors money and bets it on black.  If the roll looses he tells the client “sorry”.  If the roll wins he collects his 10 percent and does the same again at a later date… and demonstrates a 90% after expense return.    Now in real life the investment vehicle isn’t literally a spin at the roulette wheel, but a similarly functioning derivatives play or plays.

There is also the advising scam.  Start with 1024 target email addresses.  Predict, say, the outcome of an NFL football game.  Email the Colts prediction to 512 addresses and Panthers to the other 512.   Send the next prediction in a similar manner to the 512 folks who were send the correct answer (ignore the others to whom the wrong prediction went).   After, say 5 times, you have 32 folks who have all seen your prediction come true.  Hit them up for $99 to hear your next insightful pick.  If half these folks bite, there’s almost $1600 of ill-gotten gains at your disposal.  Until the cops come knocking. 🙂  [Note repeat again with the 8 folks who took your advice and you advised correctly, however this time the fee is $495.  Repeat again with the four remaining folks, then new fee is $995.  You get the idea.]


It is smart and generally easy for most people to avoid big scams and cons.  It is sad to hear about folks losing money at Indymac bank.   Deposits over $100,000 ($250,000 IRA) will likely lose most of the excess.  However, may I pointedly say “Duh!”  It is helpful to get your FDIC facts straight folks.  Yes, banks are safe, generally.  But, come on, spread it around $100K at a time ($250K IRA).  That’s pretty easy… and wise to do.

Personally, I’m asking myself “What are the risks”.  Some are market-risk.  Some are company-risk.  There are many flavors.  The US stock market is pretty well regulated.  It is among the best managed markets in the world.  However, stock brokers, they vary.   My number 1 pet peeve is excessive fees including high expense ratios and (any!) loads.  Other key peeves are lack of diversification, bad annuities (not that I know much, but someday I will do more research),  and setting up or failing to adjust investor expectation.

Sadly, I’ve barely broached the topic and ideas that are coming to mind.  Suffice it to say that it behooves an investor to aware of and wary of scams and schemes.  A good place to start is with big, classic ones like the Ponzi.  There is, I believe, a continuum of such investing parasites (parasitics?) that can drag down investment return.  High fees and loads are the most obvious example.  These are legal, but should be avoided.

Parting words for now… loads are just that– a big load of *%$#!   Best investment wishes, and to all a good night.

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