- Financial & Credit Fraud
- Identity Theft
- Investment Frauds
- Many of my friends (sophisticated investors like pension funds and endowments) who were smart investors were involved, so I would have expected them to have done their due diligence.
- I would have heard about my friends’ past success with their investment and felt I was missing out — after all, he’s been around for years
- Madoff was a professional and chair of NASDAQ, what did I need to research?
- Exclusivity. How could I say “no” when I offered an opportunity to invest? He built on that exclusivity and burning desire to be “in the club”
- In this case, the investment returns weren’t a major red flag. He was paying investors a 10% return, which is not unattainable, but to deliver this consistently is a potential red flag (as his critics pointed out over the years)
Earl Jones (who was released from prison last week) and others were different. In most other famous Canadian cases, the advisors were never registered. To see if your planner/advisor is registered you can check out the following links:
Other Red Flags to consider:
- High pressure — must buy now! It won’t be available tomorrow (or next week)!
- Guaranteed high returns
- Risk free returns
- You heard about the “opportunity” from a friend, family member or at a social event
- There’s a “genius,” “guru,” “uber-successful” person at the helm
- It’s exclusive
- You’re asked to trust the promoter without a second opinion
- Very little (or no) documentation for the investment.
If there is a question about quality of the company in any respect - especially earnings, management, unreasonable growth - just do not get involved. The best rule of thumb we can suggest is that you do not have to invest. I say it on the show all the time, you simply to not have to own it if you are not sure. However, if you do get involved with a company that goes bad, stop loss at an amount where it does not kill you. This is very hard for investors to do, nobody likes to take a loss, but it is the best thing to do. Move on, it did not work, you do not need to get your money back and the market/stock owes you nothing. To calculate a reasonable loss: If the position is 5% of your portfolio, you could see a 30% decline and it only costs you 1.5% of your overall account. That is not tragic: 30% gives you enough room to stay with it through most ‘corrections,’ but once it falls more than that, it tends to be worse than a correction and you should simply get out and move on.