It doesn’t matter how intelligent you consider yourself (and let’s remember that self-perceived intelligence is not correlated with actual intelligence), no matter how clever, well-educated and knowledgeable you are, you can still be fooled.
We received an email recently about the most prominent Ponzi scheme in Botswana at the moment: EurExTrade. The reader was clearly a clever guy, his email was well-written and logical and he asked some smart questions about the scheme and the comments I’ve made both in Mmegi and online. He said:
“Some time back I had a conversion with a friend who works in an insurance firm about investment opportunities, and they told me they were on Eurex saying they make ‘good money’.”He wondered how, if these people were making “good money”, I nevertheless considered it a scam. My point is this. They’re not making good money, they just think they are.
It’s certainly true that many, many people in Botswana have handed over their money, sometimes their life savings to these people. I heard from one reader who told me that most of the senior citizens in her home village had sent large amounts of money to them.
Admittedly I have also heard of a few people who have received small payments but very little compared to the initial payment they made in order to join. If they “invested” $1,000 they might have received $100 in profits but that still leaves $900 that the scammers have in their bank account. $900 that the investor won’t ever get back.
Another clue is how reluctant they are to explain how they make these amazing profits. On their web site they use phrases like “short term, technical analysis based positions” and “longer term, global events driven long term profitable projections” and “in house developed trading algorithms” but that’s all rubbish, just a sequence of clever-sounding words that actually mean precisely nothing.
The reader went on to say something I thought was very interesting. He said:
“What has me puzzled is that my friend is an expert in risk management so why would he invest in Eurex without doing checks and balances, throwing all their money into a scam.”That’s the most important thing. Why would someone invest in a scheme like this when it’s so clearly suspicious? The answer is complicated, it’s a mixture of causes. Part of it in some cases is simply greed. I would LOVE to invest $1,000 in a scheme that made 2.9% per day. By the end of a month I’d have over $2,000. After 90 days I’d have nearly $13,000. After six months I’d have $167,000. After a year I’d have $53 million. That’s why I’d be tempted to join.
But what about a smart, presumably well-educated risk management expert. You’d think he’d know better, don’t you?
I suggest that you go online and read an article from the Wall Street Journal entitled “How Bernie Madoff Made Smart Folks Look Dumb”. It’s about the supposedly “sophisticated investors” who threw vast amounts of money into Bernard Madoff’s remarkably unsophisticated Ponzi scheme, the ones that ended up losing a total of between $20 and $60 billion.
Despite what you might think, Madoff’s victims weren’t all geriatric, confused or stupid. They were often mature, smart, well-educated people with experience in investing. The thing they all had in common, no matter who and what they were, was that they had encountered a smooth-talking salesman who persuaded them to suspend their judgment and their critical thinking skills.
We’ve all been the victims of benign hard-selling, whether it’s a car salesman, a floorwalker in a furniture store urging you to buy things on credit or having things “upsold” in a bank but they’re relatively harmless. What worries me is when the salesperson sells you things that either aren’t worth the money or are based on lies. Things like holiday club memberships that you can’t ever cancel, loan sharks neglecting to tell you all the charges they’ll apply to your debt and, most worryingly, fake “investment schemes” like EurExTrade. That’s when aggressive salesmanship can wear down a smart person’s defences and leave you at their non-existent mercy.
That’s why I think smart people like the risk management specialist our reader knew can fall for scams just as much as you and I can. A mixture of wishful thinking, greed and clever salesmanship combine with the worst thing of all, a lack of skepticism, to make them do silly things.
The article in the Wall Street Journal about Madoff’s victims ends with this wonderfully written phrase, explaining how the words “sophisticated” and “investor” aren’t always compatible:
“If you invest with anyone who claims never to lose money, reports amazingly smooth returns, will not explain his strategy, refuses to disclose basic information or discuss potential risks, you're not sophisticated. You're an oxymoron.”The victims of EurExTrade are in this position. Any sophistication they might have had has evaporated, only to be replaced by a looming sense of abuse.