Money & Power
How to Avoid Falling for Scams and Losing Money
Even the best and the brightest can lose everything.
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Caveat emptor.

I first encountered the phrase as a teenager devouring Gone With the Wind, and it sent me scurrying off to the dictionary. In the book, the rakish hero, Rhett Butler, proposes “Caveat Emporium” as the name for the store owned by Scarlett O’Hara, the beautiful and strong-willed heroine who has clawed her way out of poverty in the post-Civil War American South. Higher education not being a hallmark of the upbringing of antebellum Southern belles, Scarlett decides that the name sounds really classy until Ashley Wilkes, the man she longs for, tells her what it really means—let the buyer beware! Yup, Rhett Butler had a wicked sense of humor.

Well, if buyers of goods and services have caveat emptor, shouldn’t people looking to put their excess funds to good use have something similar—a “caveat investor”? And the very first “caveat investor” one must observe is—know thyself, especially thy own frailties, and put them under firm control.

Some stories of swindlers’ victims are truly heart-wrenching. For example, retired school teachers hoping to stretch the earnings of their meager pensions—but for some others, you can’t help but wonder, what were they thinking?

I personally know two people with master’s degrees in business management who were swindled in what were basically Ponzi schemes. One of them, the academically gifted sister of two brilliant brothers, confided in me that she didn’t dare tell her brothers that she had been swindled out of a large amount of money, for fear of their anger.

Never allow yourself to be pressured into signing documents, especially in settings where you cannot possibly read these documents carefully.

“But why,” I asked her, incredulous. “Did you fall for the scheme in the first place?” Because with her MBA degree, she knew quite well that it was a Ponzi scheme—she was not really investing; she was lending in the expectation of earning usurious interest, to someone who would use her money to pay an earlier “investor,” and then borrow from a third “investor” to pay my friend. Ponzi schemes work because these “investors,” encouraged by the high returns, are encouraged to re-invest, and “maturities” do not occur simultaneously, but eventually, this unsustainable cycle will crash from the sheer weight of debt, leaving the “investors” empty-handed.

Both her answer and her demeanor astonished me. “I’m a risk-taker,” she said, with a degree of pride in her voice. But what astounded me more was that in the second case, I went through exactly the same routine, and the same question elicited the same answer with the same secret pride.

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In retrospect, maybe I should not have been surprised at all. They weren’t the first victims, nor will they be the last.

What’s going on here… were all these people hypnotized?

Tempering greed and tamping down conceitedness are only the first steps in sidestepping scams.

Well, clearly the hope of large, quick profits played a role in their decisions. In the case of my two friends, something a bit more insidious than simple greed was probably at work. Their characterization of themselves as risk-takers could have been a face-saving device against the embarrassment of having to admit that avarice overrode their good judgment, but I knew them well enough to know that they really did believe that they, being highly intelligent and educated, could beat the odds better than the ordinary person. Because it is true enough that early in the cycle a so-called “investor” will get his or her money back, with unbelievably high-interest earnings. The problem is, who can tell exactly when the cycle tips over from early to late stage?

Tempering greed and tamping down conceitedness are only the first steps in sidestepping scams. You have to cultivate certain attributes and attitudes toward investing and people who are in the business of handling other people’s money. You particularly have to beware when friends, and sons and daughters of friends, approach you with proposals for dazzling-sounding investment schemes in financial institutions with unknown capitalists and officers with no track record or reputations for integrity and worse, no government agency to supervise their operations.

You should also exercise some healthy skepticism about the people who actually handle your money. If you have millions to park in financial instruments and play it safe by going to a bank, the bank will welcome you with open arms and rustle up an executive of their wealth management or private banking group to assist you.

Another investor caveat should be—if you don’t understand the product, don’t put your money in it.

Because no matter how large and financially stable the bank is, the inconvenient truth is that wealth management executives are under pressure to meet both client and profit goals, and what you may think of as service beyond the call of duty is, for them, making sure that you are slotted neatly into their client base rather than in a rival bank’s.

As a result, this lawyer formulated her own caveats—never allow yourself to be pressured into signing documents, especially in settings where you cannot possibly read these documents carefully. Notwithstanding your appetite for risk, ask questions, particularly about the nature and composition of your investments; do not give the bank carte blanche to make investments on your behalf without your knowledge. Periodically review your investments and keep your records up to date.

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If you have millions to park in financial instruments and play it safe by going to a bank, the bank will welcome you with open arms and rustle up an executive of their wealth management or private banking group to assist you.

Another investor caveat should be—if you don’t understand the product, don’t put your money in it. That’s not my advice; that’s the advice (although not stated in those exact words) of Warren Buffett, probably the savviest investor on this planet.

So far, what I have enumerated are the don’ts. What about the dos? As earlier stated, you will have to rein in your natural inclination toward avarice, but in addition, it is always good to keep abreast of developments in business and the financial community.

To quote Buffett, you have to “try to read the DNA of the people running the companies… in any large financial organization, the CEO has to be the chief risk officer.

Are they single-minded in the pursuit of growth, or are these goals moderated by ethical standards? Maybe it’s a residue of a colonial mentality, but a lot of people would choose a foreign over a local bank, arguing that international rating agencies generally give multinational banks a higher rating than local banks.

I would personally prefer a local bank in which integrity is woven into the warp and woof of its institutional culture. Such a culture may not result in the largest bank in the system and I may not have the cachet that comes from having my funds managed by a multinational, at least I have a better chance of a getting a good night’s sleep.

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Araceli Z. Lorayes
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