Beware of the Con

March 28, 2014 by  
Filed under blog

So what would you do if you had a pretty good nest egg saved up but your bank was paying you a lousy 1/2% a year and a good friend just told you about how he is getting an 18% annual return, is getting paid out monthly and was on money invested with a guy he knew and trusted? Your first reaction might be, “Wow! That’s a great return.”  But then you might ask “Tell me more about this friend and the investment, cause it sounds too good to be true.”

What if he gives you an answer like this? “I’ve known this guy for several years and he’s a good guy that I have great confidence in and trust.  I invested some of my cash with him a year ago and since then he hasn’t ever missed a monthly interest payment. I just recently put all the rest of my savings into his deal a couple months ago and I even helped my poor mother out and talked her into putting most of her savings with him. She was getting screwed by the bank’s low interest rate and she desperately needed more income to supplement her social security check just to scrape by.

So, the bottom line of what you would be hearing from this friend is that he’s put virtually all his cash and savings into this “safe investment” and the return is guaranteed because he has so much trust in the deal. For all you know he may even have put a second mortgage on his house at a low interest rate so he could make the difference in the spread. I don’t know what you’d do but I know I would hold onto my wallet and run like hell.

Sadly, this kind of scenario happens almost every day. It has been particularly bad during our recent recession and now in our very slow economic recovery. I personally know 4 people that have lost almost every penny to their name because they bought into situations very similar to the one described above and these people are really quite smart and educated. You wouldn’t think they would be susceptible.

There is a very old saying that goes back to the 16th century: “Tis the part of wise men to keep himself today for tomorrow and not venture all his eggs in one basket.”  The other saying that we’ve all heard that we need to drum into our heads is “If it seems too good to be true it probably is.” One of my policies that has driven my investment life is “If I do choose to put all of my eggs or a substantial part of my eggs in one basket I must have total control over that basket and I must watch that basket very, very closely”.

One last thought.  In the example above and with the four people I know, they all had “confidence and trust” in their friend.  Guess where the origin of the term “con man” comes from?  You see these “con men” always take time to build up your confidence and trust in them before they strike.

This is not to say that there are not very good investments out there but always check them out thoroughly and make sure your investment is backed by solid, verifiable assets. Remember, don’t put all your financial eggs in one basket unless you control those eggs and watch that basket very closely!