Forex beginner | What should you do before yo...

How many times do we hear the warnings against persuasive sellers of unsuitable securities? This is a question I addressed in my book, Trust and Honesty, America’s Business Culture at a Crossroad:

“There are warnings in books, articles, newspapers, government publications,
and on the Internet, advising investors to verify offers that are ‘too good
to be true,’ to check with government agencies and their web sites, and to
obtain information about the promoters who promise short-term enormous
gains. After disastrous losses and painful experiences, the United States
Department of Justice Programs, Office for Victims of Crime, offers support
to victims. In spite of these admonitions to the victims, financial fraud
has not diminished.”

What should raise your suspicions that sellers may be dishonest or
securities may be unsuitable for you? When should you check, check and check
again to make sure that the offer you received is legitimate? Here are some
suggestions:

* There is no free lunch. A promise of very high return and very low
risk does not exist. Attached to the investment with high return is high
risk of loss. They always go together. Do not get carried away by the plus
side and look at the down side as well.
* If the companies that
offer the securities make such an offering on a continuous basis, check and
check again. Unless they are mutual funds or other types of financial
intermediaries, a continuous offering may point to a Ponzi scheme. In such a
scheme the promise of profits is too high to be achieved legitimately. Your
money is used to pay the very high dividends to other investors that
invested before you.

If you are one of the first investors, you will get other people’s
investment money as dividends. A Ponzi scheme must end when no more
investors are available. There are no profits from which to pay the promised
high dividends and the lavish life style of the sellers of the securities.
If you did not get other people’s money, your money will be spent and you
get close to nothing.

* If you do not easily understand how the business makes profits, do
not buy the securities of the business. In the case of Enron, few people
understood how Enron made money. In fact, Enron did not make money but lost
money. The numbers and valuation of the assets were manipulated to show
profits that were not there and hide liabilities that were there.
* As I wrote: “Lavish large donations and huge entertainment
budgets on behalf of businesses and corporations rather than personal
donations may raise a red flag.” It is easy to be generous with other
people’s money. Find out whether the management also donated its own money
as generously. In addition, if money is spent not on the business but on the
donations, find out what the profits really look like. Large spenders of
other people’s money may spend more on themselves as well.
* Be careful when the person who offers you the securities or the
securities themselves carry “minimal government supervision.” If the brokers
who offer you the stock are not registered with the National Association of
Securities Dealers (NASD) or the advisers who give you the advice are not
registered with the Securities and Exchange Commission or a State regulatory
agency, check and check again.

Learn to trust with caution. A con artist who is smooth, pleasant, and
utterly charming is no different from a truthful person who has these
qualities. The more money is involved in the transaction the more you must
know about the person with whom you deal.

You can buy a newspaper from a stranger. You should not entrust even
hundreds of dollars to a stranger for a piece of paper that makes a promise.
In addition, your previous connection with a person may not be reliance. It
is not by chance that con artists start business with victims in small
amounts, and let the victims win (in poker) and sell them a small amount of
stock for exorbitant price. Only them do they “bite” (in poker) or sell
large amount of worthless stock. In such a case do not rely on past
transactions but find out who the person with whom you are dealing really
is.

* Examine yourself and your own tendencies. This is the most
important protection you have against falling for persuasive sellers of
securities.

Studies have shown that the same people fall for fraudulent schemes time and
again. In fact, one story suggested that con artists who were suspected and
had to move to another area sold their victims’ list to other con artists
who would concoct another scheme and sell it to the same investors. The
chances are that those same investors would fall for the new scheme as well.

It is natural to dream of finding a treasure. Stories about others who have
found treasures seem to make the dreams possible for us as well. If others
won millions in the state lottery, why not I?

Some sellers of securities emphasize our dreams but not to the probabilities
of loss. It is good to dream, but it is important to know that a dream is
not necessarily a reality. It is important not to acquire the habit of
trying to pay for the dream, sometimes pay dearly, yet try again. The
strongest and best protector against persuasive sellers of unsuitable
securities is YOU.

Tamar Frankel is the author of Trust and Honesty: America's Business Culture
at a Crossroad (Oxford University Press, 2006). Tamar is a professor of law
at Boston University School of Law. She has taught and lectured at Oxford
University, Tokyo University, Harvard Law School, Harvard Business School
and consulted with the People’s Bank of China. Professor Frankel has written
and taught in the areas of mutual funds, securitization, financial system
regulation, fiduciary law and corporate governance. To learn more about
Tamar Frankel, please visit http://tamarfrankel.com/