If my last three columns haven’t put you off investing into something you can’t rationalise the risk for, this will surely do it. Once again, I repeat Einstein’s comment (because he was a bright guy): “if you couldn’t explain something simply, you didn’t understand it” and therefore you shouldn’t invest into it.
This is so true of many investments, and you may well remember my column on structured investment products and particularly those with early kick out options. I defy any adviser to explain the risk they carry. Think of the potential pain and potential gain. If you can’t explain that, how can you decide?
When thinking of risk, remember that conmen who aren’t convincing or charming aren’t successful. Sociopaths are like that. Don’t expect them to play fair. That’s pushing a river up a hill.
Regulatory bodies everywhere do their best to protect us, but when we stray into the new-fangled unknown we are at the mercy of the unscrupulous. Regulation cannot always protect you against fraud of course.
Take Wirecard in Germany. The auditors didn’t even spot the basic fraud over a 10-year period. They carried out mystery purchases and gave it a clean bill of health. The problem? A Wirecard executive gave the names of the merchants to be tested and were given prepaid cards supplied by Wirecard for the mystery purchases. You couldn’t write it. None of the merchants existed. The fraud is in the billions. Regulation doesn’t stop that. Law and tight auditing does.
In the USA, an ‘online pastor’ raised $3.2 million from his followers for INDXcoin. His church was run from his home, his camper van and the vacation rentals they went to.
Three hundred people in the Christian community fell for it. An auditor allegedly described the coin as unsafe, unsecure, and riddled with technical problems, but it was promoted as a low risk, high profit investment!
His marketing was a gem. He told them that God had told him directly they would get rich, and when challenged, said he might have misheard God.
Personally, I would have been listening intently. On the $1.3 million he used to remodel his home: Well, that was a ‘home remodel the Lord told us to do’. What a beauty. Not one of the 300 thought to ask: “If God is talking to you and he wants us to be rich, what are the lottery numbers, horse racing or football results?”
And now to FTX and Mr Bankman-Fried who is currently behind bars. It’s not like people weren’t warned. On a podcast in early 2022 he slipped up saying that a ‘business plan was to create a box of crypto tokens that have no value and sell shares in that box based on assigning it a spurious value’. Eeek. So, the junk products you sold turned out to be junk?
FTX filed for bankruptcy seven months later. His parents are being sued to claw back $10 million in cash they received and a $16.4 million luxury home in the Bahamas they were gifted by their son. They want the lawsuit dropped for some reason.
They say they expect to have sufficient funds to repay all allowed customer and creditor claims in full. Well, that’s based on the prices at the petition date after the crypto market crashed. So you will likely get 100 per cent of the thin air that now existed at that petition date.
There has been a heap of other targeted frauds which have collapsed. Consider also the funding through coins of the zany ‘sovereign cities for Bitcoiners’, Cryptoland in Fiji, and the roll off the tongue, Crypto-kingdom of Bitcointopia in Utah.
I refer to Einstein earlier.
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have an investment question for Peter, call 028 6863 2692.