While it may not be our favorite topic, all of us have been taken advantage of at some point in our lives. The recent FBI crackdown on a $100 million-plus ATM Ponzi scheme perpetrated in our own backyard hit close to home for many of our clients and has been a frequent topic at recent client meetings.
For nearly 15 years, the deal had percolated in local country clubs, business associations, religious networks and the like, and it crossed our desks at Singer Burke more than one time. According to FBI statements, the scheme purported to lend money to a company that would place ATMs in high-traffic locations, attracting investors with guaranteed” annual returns of 20% per ATM. The high returns and low perceived risk attracted investors in large numbers. What may very well have started out as a legitimate business ultimately collapsed, leaving a trail of questions. The fund claimed to have operated over 30,000 ATMs shortly before it fell apart, though according to the FBI no more than 250 ATMs actually existed.
Borrowing from Peter to Pay Paul
What was actually happening appears to be closer to the old adage of borrowing from Peter to pay Paul: Money raised from new investors was being used to pay out old investors. This scheme was first popularized by Charles Ponzi, an Italian immigrant of meager means who invented an elaborate scheme in the early 1920s that claimed to capitalize on currency fluctuations and international postage treaties. The carrot he dangled? Guaranteed interest payments of 50% in 90 days. The Ponzi scheme had been born.
So how are we still falling prey to the same scam nearly 100 years later? And how do whole communities keep getting caught up in these situations?
Hopefully you caught the key phrase I emphasized in the two stories above: a guaranteed return.
Chasing the American Dream
The current environment seems particularly accommodating to these too good to be true” deals. Studies continue to show that the average investor has not saved adequately for retirement. Worse, many timed the market in such a way that they still haven’t recovered from the 2008–2009 stock market crisis. The net result is that you have people on the brink of retirement who still need to make significant investment returns but can’t really afford to take the risk anymore.
What’s more, many investors have latched onto an American Dream of living off the interest” of their portfolios. (We at Singer Burke have a different philosophy, but that’s a topic for another time.) It speaks to a success enjoyed by America’s rich elite families for decades and suggests prudency and safety in not depleting your principal investment balance. As many of you know, living off interest with current yields as low as they are has become nearly impossible for most families. But investments with sizable, seemingly guaranteed cash flows seem to be able to keep the dream alive.
So how can you know if your next investment opportunity might be a scam? Those of you with whom I’ve spoken have likely beat me to my punchline, but it bears stating loud and clear:
Risk and return are related.
If someone promises you returns that sound higher than normal and suggests that the risk to earn said returns is lower than normal, that person is lying to you or doesn’t understand the risk involved. Let me tell you: Neither is going to make for a good investment partner.
A 20% annual gain pencils out to be more than twice the historical return of the U.S. stock market (S&P 500), but stocks have a lot of ups and downs, as you know. If it were possible to make a guaranteed 20% each and every year, you can bet that every bank in Americaâ€”nay, every businessâ€”would be shutting down and making their money with this strategy.
This is the same argument I have against investment newsletters that send out their timely stock tips to thousands of Internet subscribers: If it really were a sure thing” or even a highly probable thing,” for that matter, these people would be mortgaging their houses to buy it for themselves. Not sending out emails â€¦ to Internet strangers â€¦ for free.
Always Think Twice About the Shortcut
So I challenge everyone to use this recent scheme as a reminder to be brutally honest about your financial goals and investment plan. Question the easy answers and the shortcuts. As any successful business owner will tell you, there are none on the road to making money.
If you find yourself still longing for a quick fix” to your financial future, perhaps it’s time to revisit your financial plan and explore more common-sense solutions: cut back expenses, downsize your principal residence, work a few more years before retirement or take more stock market risk early on in a diversified, prudent way.
And if you have a thoughtful financial plan and a team of trusted professionals around you, be thankful that you can ignore the next hot investment” that makes its rounds. You have the confidence of knowing you don’t need a quick fix to orchestrate the life you want for your family. And hopefully you get to sleep more soundly at night for it.