Blog / Business / Life · June 2, 2022

Risky Investments: What I’ve learned so far

If you’ve lived on this earth long enough, one thing is for sure. You will be approached by friends who mean well, with an investment opportunity that sounds too good to be true.

All of us will have a different perspective of what sounds like a scammy opportunity. It might come in the form of a Multi-Level Marketing scheme that later turns out to be a Ponzi scheme. It could be a money game where you put some money into an account and after a few rounds, you get your money back with interest. That is of course, if you are early into the game and not the last ones through the door and left holding the proverbial bag.

My most recent approach is the one I’d like to blog about today. As with any form of opportunities in this category, the rewards were exciting but the reason why I wanted to highlight this “opportunity” in particular is because I feel that I am applying all my bitter experiences plus realisations in forming an opinion of whether to invest or not.

One thing I would like to make clear though, is that, I don’t fault the people that approach me with these type of opportunities. Most of the time you will be approached by a friend. They do that because part of the scheme is to introduce your friends to the scheme as well. So almost all the time (exceptions are “friends” who aren’t really your friend) these friends don’t know any better and are just doing what they are asked to do or what everyone is doing.

Schemes usually follow a pattern. There is a story. There is a history of others transforming their lives. Then there is the opportunity. And maybe an event or invite to meet people who are better versed or closer to the instigators, “to have your questions answered”.

This time around, the story goes, there is this fund manager in Indonesia who has an awesome track record trading in currency and gold. He’s set up a fund where he will trade on your behalf. Or in other words, add your investment into his war chest, use his skills to trade for you and then share in your profits. And even after taking out his share, the balance due to you is still much greater that it would be in the traditional type of investments.

(*ok just as a note here, I am not about destroying other people’s rice bowls or cause problems for my friend. So i am only revealing info that is pertinent to this post. No names of companies etc)

In this case, depending on the packages you take up, annual returns can be from 20+% to 30+%. An initial investment of about USD 11,000 of which about 30% is placed in a low yield currency trading basket and the balance 70% is in a higher-yielding account. And for this, the projection is an annual return of about 25%.

With bank interest rates on 12 month FDs at 2%, 25% is a big difference.

And thanks to some bitter and hard earned experiences, this is how I proceeded to dissect this investment “opportunity”

1. First thing is to quieten the voice in my mind that is screaming, “IT’S A SCAM. RUN!!!” and “If its too good to be true, then its probably not true”, etc.

To properly learn from this and identify what to be wary of, I need to approach this in a logical and systematic manner. In this way, I can create a process to evaluate this and any future “opportunities” fairly.

2. Do your due diligence. Google every single name you can find. Company name, exchange name, director’s name etc. And while you are at it also google those same things, company name, exchange name, and director’s name and add “scam” behind it in the search and see what pops out.

In this case, although the exchange had a website, it was not designed in a way to give me confidence that this was a bona-fide multi-million dollar exchange.

Bona-fide exchanges would at the very minimum, have the live (or slightly delayed) prices and volume of all the financial instruments that are traded on their exchange.

3. Next look at what is FACT and what is FICTION. In other words, what is a must and what is a maybe.

In this case, FACT is – I must send my hard-earned money to them. In this case USD 11k or about RM 50,000. If i don’t send them this cold, hard cash, I can’t play in the game. No high returns for me.

FICTION is the promised returns. The potential returns highlighted in the brochures are just that, promises based on past returns (of which by the way, you are just trusting their word coz there is no way you could have audited their accounts and said, yes that returns last year is true.)

So separate what is FACT and what is FICTION.

4. If these haven’t got the alarm bells ringing loudly as yet, we can then proceed to the next step. And that is to apply conventional business and financial calculations to the “opportunity”

And in this case, while 20+ or 30+ % returns sounds good, from a money game perspective it means that I give USD 11,000 to the trader and at the end of the year he gives me back USD 2,200 (20% of my USD 11,000).

Question: Could they just be using my own capital to pay me back slowly? Could the returns be from new money coming into the scheme?

Although this is not a deal-breaker, as banks are doing the same at much lower returns, the fact that the trader is not a bank and not regulated under banking regulations, is a major factor to consider.

What are the laws and regulations governing the trading company and funds they manage in their country of incorporation?

5. Since 4 is not totally a deal breaker, then we go another step.

If I had an FD account with the bank for tenure 6 months for example, but after 1 month, I had need of the funds. What is the process of getting my capital back? And how does that compare with the “opportunity”

In the bank’s case, canceling the FD is not an issue at all. Foregoing of the promised interest rate is understood. And usually, by the next business day, the capital or principal sum is back in my current or savings account.

The response I got from the reps or the opportunity, however, was different. They said that any emergency withdrawal would be a case by case basis and had to get clearance.

So this got me wondering about 2 things. Is there a lock-in period and what are the steps in withdrawing the monthly interest portion (initial capital of USD 11k remains under their management).

6. So I found out that there is a lock-in period and surprisingly, the higher the investment package the longer is the lock-in period.

Lock-in periods aren’t a deal-breaker for me either. I mean there are funds offered by banks that also have a lock-in period and penalize you if you liquidate before the lock-in period expires.

What was a deal breaker though was the lack of a mechanism to break the lock-in period and get my capital back. Between a case-by-case basis vs an agreed-upon, transparent withdrawal method, only the latter can be challenged in a court of law.

7. After further questions on interest portion withdrawal, I was then informed that there is a processing fee of x % and that in this scheme, for accessing the opportunity provided by the “expertise” of the trader, there is a profit-sharing of 45/55. I assume the 45 is for the trader, but I may be wrong.

Now the deal-breakers are coming in hard and fast.

First off, it seems like not the whole USD 11k will be used to maximize my returns. x % is taken off the top first and pocketed away by the trader’s company before the balance is applied for my benefit.

Next thing is every profit is shared but what about losses? It seems that if it is a trading loss, then I bear 100% of that loss. That did not seem quite fair. Especially since I paid you x% alreay for your “expertise”.

On the issue of withdrawal, would it surprise you that the company will only send you your profits about a month after you request it?

So let’s say that on the 1st of February, the trader’s company reports to you that you made USD 176 for the month of January (promised 20% / 12 months = 1.6 % monthly. 11,000 x 1.6% return = 176).

You then proceed to request a withdrawal. You get it approved and the date of remittance will be March. That’s like quite a long time to get my interest portion back. In the meantime, it is reflected in my online account except that it is not hard currency in my hands until I get it in my bank and under my sole control.

8. Treasure what you have. Although we want our money to work hard for us, we also have to consider Capital preservation.

You’ve made some effort to earn this money, make sure you have exhausted all reasonable doubt and ensured that the money you invest has a good chance to get back in your hands. At least the initial capital even if things don’t go as planned.

After all, most of us want to build our wealth for our family, right? What use is it to place that money in an opportunity that your heirs or estate might not be able to get their hands on.

So be sure to find out what are the survivorship clauses and transfer to heirs that is promised.

In this “opportunity” case, that is not addressed. They just want my money without the need to know who my next of kin are or having a full contract between myself and the trader’s company. The only thing i am supposed to sign is a document appointing them to trade on my behalf.

9. Finally, after applying logic, it is time to listen again to our inner voice.

After going through this i realized that a part of me wanted to put in a small amount in this scheme. Part of that was due to FOMO and another part because of friendship. My friend that had introduced me to this opportunity had good intentions. I wanted to reciprocate somehow.

But then i stopped myself and reminded myself or another lesson I learned and apply. When you are making a financial decision, we must use financial logic to resolve it. Not the emotional logic.

So after thinking rationally and seeing that withdrawal can be an issue coupled with the unreasonable fees involved not to mention the lack of transparency in these dealings, my decision is not to go forward on this. If my friend feels offended, I can’t help how he feels.

Important lesson here is always to figure out how you are going to get your money back first. Don’t get swayed by the “fiction” of future promises until that part, the return and preservation of capital has been answered satisfactorily.