Financial scams: How not to get conned

History is full of examples of intelligent people who fall prey to investment scams, said Stephen Greenspan in The Wall Street Journal. “Financial scams are just one of the many forms of human gullibility.” Still, recent news that former Nasdaq Chairman Bernard Madoff allegedly defrauded investors of some $50 billion shows how gullible people can be—even people like me. “I lost a good chunk of my retirement savings to Mr. Madoff, so I know of what I write on the most personal level.” Investment schemes, like asset bubbles, thrive on the human tendency to follow the herd, as word of the seemingly miraculous positive returns of early investors “makes the investment seem safe and too good to pass up.”

“Much of this loss could have been prevented” if investors simply had exercised more skepticism, said Paul Sullivan in The New York Times. Madoff’s investors were so eager to join his “exclusive” club that they either didn’t bother doing due diligence or assumed that others had already vetted him. “Some of the wealthiest people in America, Europe, and Asia primped and posed in the hope that he would select them to feed into his Rube Goldberg machine.” Not all investors have the money to score the insider “deals” that the Madoff investors did. But we all can learn one thing from the stories of investors who’ve lost everything. “The most basic book on investing will tell you never to put more than 5 percent or 10 percent into any one investment.”

To avoid a scam, “keep things simple,” said Steven Goldberg in Kiplinger.com. Question unrealistic claims. There are certainly a few money managers who—“by dint of a passion for what they do, a disciplined approach, enough smarts, and lots of hard work”—can beat the overall market. “But not by a lot, and certainly not all the time.” As for “smart money” investors who promise to make their clients money shorting stocks or using complicated securities, “I don’t think any such geniuses exist.” Even when you find an honest advisor with real credentials, never “sign over a check directly to him or her.” Deposit the funds in a reputable brokerage firm instead. “That allows your advisor to buy and sell securities for you, but prevents him or her from emptying your account and heading for Tahiti.”

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