\u201cWhat do you think of XYZ investment? Is it legit or a scam?\u201d<\/p>\n
A question I\u2019m starting to get a lot. Difficult. Because as much as it makes me feel like a guru, and I\u2019d like to give Yes\/No answers on every investment out there, it\u2019s just not practical. A better solution is to help people develop their own bullshit-detection skills \u2014 so they don\u2019t have to rely on others to make decisions.<\/p>\n
For this article, I\u2019m using \u201cscam\u201d to describe a scheme that\u2019s designed to cheat people. There\u2019s a difference between this and a bad business decision. Something can be a legitimate investment, and still lose tons of money: Example: ask older people who got burned in the stock markets during the 1997 Asian financial crisis. A story for another day.<\/p>\n
Today, we\u2019ll focus on how to detect scams that are out to cheat your money. Here\u2019s my mental checklist for protecting myself \u2014 hopefully you\u2019ll be able to use it too.<\/p>\n
First, genuine investments never guarantee profits.<\/p>\n
There are exceptions \u2014 like fixed deposits in a bank, or an endowment plan from an insurance company. But your guaranteed returns (a.k.a. profits) will always be low. What\u2019s considered low and high? Read on in Point 2.<\/p>\n
Other investments that promise you guaranteed returns? BIG RED FLAG.<\/p>\n
I know, we\u2019re always looking for certainty and security. But the thing about investing, business, and even life, is there are no guarantees. Accepting this \u2014 that there are risks and rewards in everything we do \u2014 puts us one step further down the path of wisdom.<\/p>\n
Not only do scams offer you \u201cguaranteed\u201d profits, they also promise unrealistic numbers. How do you know if something is unrealistic or not? From the looks like it, most people have absolutely no idea. The Securities Commission of Malaysia<\/a> ran a survey in 2018 with some insane results:<\/p>\n \u201c\u2026investors perceive that an annual return of 12.4% is considered low, 24% as medium and 42.9% as high.\u201d<\/p>\n To put this into perspective, if you consistently earned 12.4% profits every year (what many Malaysians consider low), you would already be considered a \u201cgreat investor.\u201d As in, you could become a professional money manager, people would pay you disgraceful amounts of money, and your smug face would regularly appear in newspaper columns.<\/p>\n Earn 24% returns annually, and you\u2019re already better than world-famous Warren Buffett and many other \u201cgreatest investors\u201d of all time. Make 42.9% a year, and all the greatest investors of all time would be sitting at your feet, trying to learn from you.<\/p>\n A few notes on the above. First, these are personal expectations, meaning don\u2019t hate-DM me if your apartment price only increases by 1% this year. Similarly, I\u2019m not saying your favorite stock won\u2019t go up 20% next month.<\/p>\n What I\u2019m saying is, based on my research<\/a> and experience, these are how I\u2019d expect investments to generally perform. Like if I put money in the stock market, and keep making 10% losses every year, I know I\u2019m doing something wrong. On the flip side, if the EPF declares dividends of 8% this year, I\u2019ll rejoice \u2014 but also know it\u2019s above expectations.<\/p>\n \u201cWhat about Unit Trusts,\u201d you ask? Well because unit trusts (a.k.a. mutual funds) typically invest in some combination of bonds and stocks \u2014 I\u2019d expect similar results. For example, I\u2019d expect a unit trust that invests mostly in stocks to return around 10% per year.<\/p>\n Of course, I\u2019m oversimplifying things here. An entire library of books could be written around investment returns, but I just wanted enough info to help set realistic expectations. Investing is a get-rich-slowly thing. Notice how \u201cexpected returns\u201d never goes above 10%?<\/p>\n This is how we know your long-lost friend\u2019s \u201cbusiness opportunity of the future\u201d promising 20% per month is a scam.<\/p>\n A legitimate investment doesn\u2019t need you to sign up another 3 people for you to get paid. That\u2019s a red flag which happens with pyramid schemes. Because if you think about it logically, why does the business need you to \u201crecruit\u201d people?<\/p>\n If they\u2019re really investing your money, all you need to do is give them money and wait. Nothing else. No such nonsense like \u201cIf you get 3 people under you, then you get 7.5% of their profits also. And if they get 3 people under them, then you get 3.75% of the downline profits too! EVERYONE WINS!!!\u201d<\/p>\n Unless of course, it\u2019s really what\u2019s known as a Ponzi scheme, where new investors\u2019 money is used to pay earlier investors. Which goes on and on until there\u2019s not enough new investors \u2014 then everything collapses and we see \u201cRetired housewife loses life savings in money game\u201d headlines. When the music stops, people get exposed.<\/p>\n Caveat: You know those \u201cSign up with my promo code and we\u2019ll both get RM10\u201d messages you keep receiving? Annoying, but definitely legal. The difference is, promo codes are usually a small amount (~RM10), but even if you don\u2019t refer anyone at all, you can still use the platform, invest money and earn profits same as everyone else.<\/p>\n \u201cThen what about multilevel (network) marketing,\u201d you ask? Well those need you to actively work to earn money. Investing for me refers to something much more passive: parking your money, and letting it automatically generate profits (with a risk of losses) for you. I\u2019d consider MLMs more of a side hustle \u2014 one that historically most people don\u2019t earn good money from \u2014 but technically legal if they follow the rules.<\/p>\n Just be very careful, because scammers like to mix MLM elements into their \u201cinvestment\u201d proposals, which makes it more confusing for everyone and harder to evaluate. Wouldn\u2019t it be helpful if the authorities did something?<\/p>\n Which brings me to\u2026<\/p>\n There\u2019s actually a \u201clife hack\u201d to all this. If you\u2019re still confused, not interested in how to detect lies (really?), or just want an easy answer, here goes: only invest in things regulated by the government.<\/p>\n Yeah, I know \u2014 if you\u2019re a sophisticated investor, it\u2019s possible to make money trading 100x-leveraged USD digital oil futures on an exchange owned by a shell company in Seychelles. But the majority of people are not sophisticated investors. We just don\u2019t have the time, knowledge and expertise to understand such complex instruments.<\/p>\n Hence, it makes sense for most people to take the safe route. The good news is there\u2019s tons of approved investment platforms here in Malaysia. Whether you wanna invest in stocks, bonds, ETFs, properties, peer-to-peer financing or even something as exotic as Bitcoin \u2014 you can check whether the company you\u2019re investing with is regulated:<\/p>\n Regulation means in case something goes wrong (e.g. the founders of the company steal your money, or your personal data gets hacked), the government actually has power to help you. But if you invest in something unregulated, it\u2019s extremely difficult for the authorities to go after the bad guys.<\/p>\n And just in case you\u2019re super risk-averse, the Malaysian government also keeps track of unauthorized money-related schemes via Bank Negara here<\/a> and the Securities Commission here<\/a>. (Don\u2019t invest in those.)<\/p>\n Another tell-tale sign of a scam is unethical sales tactics. The heartbreaking thing is these tactics work, especially on the poor and needy.<\/p>\n Some examples:<\/p>\n The above tactics are shady at best, criminal at worst. They\u2019re also usually presented with urgency: \u201cLimited offer today! BUY NOW OR YOU\u2019LL LOSE OUT!!!\u201d Combined, these psychological tricks are often strong enough to make even smart people do stupid shit with their money.<\/p>\n Remember, investing is a business decision. It\u2019s about numbers and dollars, and you should always take time to think carefully. It should feel boring. You\u2019re not joining a cult or falling in love. If you feel emotional, run away.<\/p>\n I left this one for last because it\u2019s the toughest. It takes some business knowledge and experience to understand if something has a proper business model \u2014 where people can legally and ethically make profits.<\/p>\n Because if it\u2019s a scam: look deep enough into the fine print and business structure \u2014 and you\u2019ll discover all kinds of alarming things.<\/p>\n Don\u2019t be fooled by complexity. The legitimate people in this world try to simplify things for normal people. It\u2019s conmen who try to confuse.<\/p>\n If you have interest in business and investments, over time you\u2019ll build your analytical skills here. If not, refer to Section 4.<\/p>\n But if ever in doubt, here\u2019s a fundamental principle which will serve you well:<\/p>\n If you can\u2019t understand it, you shouldn\u2019t invest in it<\/em>.<\/p>\n Investment scams happen because people want to believe in the sweet lies scammers sell. People want to believe it\u2019s possible to earn big money in a short time. People want to believe they should get paid without producing any value. And people want to believe there\u2019s an easy way out from their problems.<\/p>\n Yeah, there\u2019s probably some greed there. But in our world of instant gratification and Insta-materialism, can you really blame people for wanting to upgrade their lives? It\u2019s almost ingrained in our human nature.<\/p>\n The deeper issue I think, is most people today feel stuck. What everyone is actually looking for is hope. Money; quick, easy money seems like the solution.<\/p>\n But maybe the real solutions can be found in good, old-fashioned principles.<\/p>\n Lessons from history that can still guide us today: Success, in money, business and life takes time. Building wealth requires discipline and hard work. And unfortunately, there will always be scammers and people who get scammed, because they wanted fast money.<\/p>\n Thankfully, you won\u2019t be one of them.<\/p>\n\n
<\/span>3. It asks you to recruit members to get paid<\/span><\/h2>\n
<\/span>4. There\u2019s no regulation<\/span><\/h2>\n
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<\/span>5. It uses unethical sales tactics<\/span><\/h2>\n
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<\/span>6. The business model doesn\u2019t make sense<\/span><\/h2>\n
<\/span>Conclusion: Why people fall for investment scams<\/span><\/h2>\n