Saturday June 5, 2010
How to be a wiser investor
Review by ERROL OH
errol@thestar.com.my
How to Smell a Rat: The Five Signs of Financial Fraud
Author: Ken Fisher, with Lara Hoffmans
Publisher: John Wiley & Sons
WHICH kind of investor are you – Confident Clark, Hobby Hal, Expert Ellen, Daunted Dave, Concerned Carl or Avoidance Al? If you’re one of the first three, there’s little chance that you’ll lose money in a scam, according to Ken Fisher, head of Fisher Investments, a California-based money management firm, and a longtime Forbes columnist.
But he believes that Dave, Carl and Al ought to be extra vigilant in making investment decisions, particularly when it comes to choosing advisers.
He warns: “Con artists love Dave, Carl, even Al. If you see yourself in one of them, you’re more likely to hire a pro, but you’re also more likely to be conned.”
Having spent decades managing money, and writing and speaking on investments, Fisher has learnt plenty about investors. With some clever use of alliteration, he divides them into six categories .
Clark is the sort who thinks he’s the best person to decide where to put his money; he won’t trust somebody else to do that job. Hal is dead serious about investing and is always honing his skills and knowledge in this field. Even when he has an investment adviser, he’ll be in the thick of things. Fraudsters tend to stay away from Hal because he’s too involved in his investments.
Like Clark and Hal, Ellen knows a thing or two about investments and enjoys the challenge of extracting the best returns. However, she’s usually too busy to do it all on her own and will leave it to the professionals. Still, because she’s not easily fooled by fake profits and she’s more questioning than most investors, she’s not your typical fraud victim.
But Dave is, because he’s intimidated by the complexity of investing and prefers to hand his funds over to others to manage. Carl is similar except that his dependence on professional help is driven mainly by the worry that he can’t achieve his investing goals on his own.
Then there’s Al, who will have nothing to do with investments if he can help it. He doesn’t even like thinking about hiring an adviser, but when he does appoint one, he won’t bother keeping track at all.
“Rats are looking for financial illiterates. They want victims who won’t question too hard – either because they’re busy, intimidated, or easily distracted by outsized performance claims,” wrote Fisher.
Not-so-common sense
If you see yourself as Clark, Hal or Ellen, don’t be too quick to think that you’ll never be cheated. Fisher likens such false sense of security to a guy not taking care of his health just because his doctor has declared that he has a low risk of heart failure.
Ken Fisher
He explains: “You may feel like Clark or Ellen right now. But the same investor can actually morph over time into someone else – happens all the time. The way investors see their needs can easily change.”
For example, during bull markets, investors may be assured and aggressive in wanting growth, but when the bears are on the prowl, the same investors sing a different tune as they turn wary and instead focus on capital preservation.
It’s this kind of deep insight and understanding that makes How to Smell a Rat a worthwhile read. It essentially peddles common sense, but Fisher’s vast experience and expertise makes all the difference.
There will always be crooks on the prowl for easy marks, and there will never be a shortage of people who can be seduced by promises of generous returns on their money. As such, anything that helps us avoid investment scams is useful.
Fisher shows the goods very early in the game. On page 5, he lists the five signs (see box) referred to in the book’s subtitle.
“Note: Just because your manager displays one or a few signs, it doesn’t mean they should immediately be clapped in irons. Rather, these are signs your adviser may have the means to embezzle and a possible framework to deceive. Always better to be suspicious and safe than trusting and sorry,” he advises.
If you had committed these signs to memory, you might be tempted to ditch the book at this point, but you would have extracted only a fraction of its value.
Mere awareness of the red flags is inadequate protection; an enlightened and responsible investor should have a reasonable grasp of how con artists operate and of the weaknesses they exploit.
Critical signs
This is where the book comes in most handy. When elaborating on the five signs, Fisher illustrates with examples that highlight commonalities among infamous swindlers such as Charles Ponzi, Ivar Kreuger, Robert Vesco, Bernard Madoff and R. Allen Stanford.
Through this, you appreciate the fact that though the specifics vary, the scamsters’ game plans are pretty much alike. The investment schemes are typically structured in such a away that the advisers have way too much control over the money and the investments.
The advisers promise returns that are almost too good to be true, and they often have trouble articulating their strategies in simple terms. They prey upon the same types of people. If you’re wholly mindful of what these warning signs mean, consider yourself inoculated against the investment fraud virus.
How to Smell a Rat is in part a self-improvement title. It is enriching because Fisher discusses the foibles and circumstances that enable con games to thrive.
When writing about how the culprit behind a hedge fund scam used impressive-sounding gobbledygook to dupe people, Fisher is actually telling us that our pride can lead us down the path to financial ruin.
“Remember, his victims weren’t stupid. But folks who consider themselves smart may not always question -- they don’t want to reveal they don’t understand. Many smart people have a hard time getting their egos to openly admit they don’t understand,” he tells the readers.
Another lesson: The investor himself must do due diligence before handing over his money to the adviser. “(Due diligence is) not complicated, but enough folks won’t do the check – and con artists count on that. It’s your money – you alone must do the check. Don’t let anyone in the middle,” urges Fisher.
Of knights and the Net
Often droll and cutting, the author is an engaging guide and teacher.
A target of his barbs is Stanford, chairman of Stanford Financial Group. In February last year, the US Securities and Exchange Commission filed an action, alleging that Stanford and his companies orchestrated a US$8bil fraud and that he was conducting a Ponzi scheme.
In making his point that fraudsters are fond of crafting flashy facades, Fisher likens Stanford’s knighthood from Antigua to a Cracker Jack box prize. “Elton John’s been knighted – but at least he was knighted by the Queen of England. Still, do you want him managing your money?” he asks.
His opinions are always firm and passionately argued, but at times, they can be rather eccentric, such as his blithe dismissiveness towards the influence of New Media.
“I would never believe things I read on blogs about anyone, ever, good or bad. You have no way to know what’s behind them, and often it’s nonsense. Actually, more often than not, it is nonsense! The Internet and its natural feature of anonymity bring out the very worst in a great many people,” he grumbles.
“Don’t ever believe Internet blog postings or comments on articles on even major websites. There isn’t integrity there, so don’t buy it, either way – whether it’s helping the reputation or defaming it.”
Here he sounds out of step with what’s happening out there, but this shouldn’t detract from the wisdom that Fisher offers in How to Smell a Rat.
According to Ken Fisher, there are ways to tell if your investment adviser may be a swindler or may evolve into one. In How to Smell a Rat, he provides a checklist:
1. The biggest red flag – your adviser also has custody of your assets.
2. Returns are consistently great.
3. The investing strategy isn’t understandable.
4. Your adviser promotes benefits (such as exclusivity) that don’t impact results.
5. You didn’t do your own due diligence, but a trusted intermediary did.
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