How To Avoid Investment Scams

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Photo by Jp Valery on Unsplash

Back in 2015, while travelling, we went to the Canadian Consulate in Chiang Mai, Thailand to request some tax documents for our first book.

There, we met another Canadian, who was trying to convince the Canadian consulate to fly him home for free because he’d run out of money. Let’s call him “Nick”. Nick, as it turns out, was in a dire situation because after selling a multi-million dollar company, he’d bet hard on a second start-up, which was hemorrhaging money and was in Thailand with his Thai wife, hiding from his creditors.

He started chatting us up, saying how we had this inexplicable “happy glow” and wanted to know what our secret was. Luckily, we hadn’t started this blog or written Quit Like a Millionaire yet, so all he knew about us was that we were software engineers taking a gap year to travel the world.

He was charismatic and interesting enough that we got along well and went out to dinner a few times (he, somehow, still found enough money to eat out). He showed us videos of his business partner on Shark Tank, talked about how he was featured on “Forbes 40 under 40” and at one point was worth 20 million dollars. And then just one week after telling the Canadian consulate he was broke, he allegedly made some “calls”, and found some angel investors to invest in his new business idea and was now suddenly flush with cash (which he proved to us by opening his wallet and showing us a thick stack of bills, totalling 35,000 Baht, the equivalent of $1000 USD).

Just as I wondering what is up with this guy, he started pitching to us about a “once in a lifetime” business opportunity, where we would code his new app idea and sign on to a contract to work with him for a year, and he would pay us in company shares, after it “goes gang busters”. Apparently, he’d already sold this idea to his investors in Silicon Valley and they were eager to get started. All he needed was to get us on board to code it.

The catch, was that we had to sign the contract in order for him to tell us the idea because he “didn’t want it stolen”. I was straining so hard not to roll my eyes I gave myself a headache. So, basically, Nick wanted us to do the coding for free, and would only tell us what we were working on AFTER we signed a contract with him.

Sounds legit.

Clearly, I wanted to be a part of that deal as badly as I wanted a traumatic brain injury. Plus, who flashes $1000 USD worth of cash in public in a foreign country? This whole thing had more red flags than all of China.

Needless to say, I rejected Nick’s offer and his promises of fame and fortune. He implied I was being “too negative” and was “holding my husband back”. Then he walked away, shaking his head and muttering “f*cking engineers. So damn skeptical.”

This is the memory I flash back to whenever anyone tries to get me to invest in crypto or NFTs.

And I’m not alone. At the recent annual Berkshire Hathaway shareholders meeting, Warren Buffett gave the best explanation on why he won’t buy bitcoin:

Aaron Friedman, CC BY 2.0, via Wikimedia Commons

If you said … for a 1 per cent interest in all the farmland in the United States, pay our group $25 billion, I’ll write you a cheque this afternoon.

For $25 billion I now own 1 per cent of the farmland. If you offer me 1 per cent of all the apartment houses in the country and you want another $25 billion ($A35 billion), I’ll write you a cheque, it’s very simple…The apartments are going to produce rent and the farms are going to produce food.

If you … owned all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it. Because what would I do with it? I’ll have to sell it back to you one way or another. It isn’t going to do anything.

Ouch! I hope they make aloe vera for bitcoin, because it just got BURNED.

Whether it goes up or down in the next year or five years or 10 years, I don’t know. But one thing I’m sure of is that it doesn’t multiply, it doesn’t produce anything. It’s got a magic to it, and people have attached magic to lots of things.

–Warren Buffett

The “magic” part is exactly what scared me off Nick’s proposal in Thailand. Don’t work with shady people who are opaque about their intensions, and don’t invest in “investments” that grow “magically” without producing anything.

Some people compare bitcoin to digital gold, saying that even if it doesn’t produce anything, as long as the world agrees it has value, it’s worth investing in.

I disagree. If it doesn’t produce anything, it’s not worth investing in. That’s the same reason we don’t own gold. You don’t get any benefits until you sell it and it doesn’t pay you to own it. You have no idea when to sell (what if you sell and it goes up even more? What if it crashes and you don’t get out in time?) and if you hold it forever, you never get paid.

If anyone tries to sell you crypto as the “fast track to riches” don’t believe them. We avoided that trick back in Thailand with Nick because our skeptical engineering brains helped us avoid his scam. It doesn’t matter how much tap dancing and razzle-dazzling he was doing, I wasn’t buying it.

I have no idea where Nick is now. Suffice to say, his business idea didn’t take off because none of the fame and riches he predicted came true.

Be skeptical (think like an engineer), don’t invest in opaque investments, and if it isn’t diversified and doesn’t pay you to own it, it’s not worth owning.

Here’s a few ways you can avoid investment scams:

Is it regulated?

Make sure the platform handling your investments is regulated.

For Canadians, Questrade, the brokerage we use and recommend, is regulated by IIROC (Investment Industry Regulatory Organization of Canada) and CIPF (Canadian Investor Protection Fund). As a result, our assets are protected against brokerage insolvency and/or unauthorized trades.

For Americans, Vanguard is a member of Securities Investor Protection Corporation (SIPC), which protects its customers against brokerage service failure and/or unauthorized trades.

Can you tell what’s in it?

For every ETF we own, we can look at the list of holdings and see exactly which companies we invest in. Here’s the one for VTI. If you’re going to invest, you need to know and understand exactly what you’re investing in.

Does it pay you to own it (without using a Ponzi Scheme)?

A Ponzi Scheme dupes investors into thinking they’re getting a high yield when in reality, it’s simply paying existing investors with new investors’ money. That’s why Ponzi Schemes always needs a stream of new investors to buy into the scam. If no new investors can be found, it falls apart.

Index funds don’t require new investors to continuously buy it in order to pay dividends. The dividends come from distribution of corporate profits.

Don’t buy investments that require you to time the market and find a greater fool to sell to. Make sure you get paid to own it. And that pay should legitimately come from corporate profits or rental income. If an “investment” doesn’t produce anything, be suspicious about where its yield is coming from.

Is it liquid?

Liquidity means how quickly and easily an asset can be bought or sold at market value.

Homes are illiquid, meaning it could take several weeks or months to find a buyer.

VTI, which has an average trading volume of 4,737,027 shares per day, is very liquid. I could sell it within seconds.

When it comes to investments, we don’t buy anything we can’t drop in 30s flat, because when things turn bad, you don’t want your money trapped.

That’s why even with the recent volatility in the markets, I haven’t lost one second of sleep. Our brokerage is regulated, we understand exactly what’s in our portfolio, it’s liquid, diversified, and the passive income it produces, made up of dividends and interest, easily covers our expenses. Not only do I not need to worry about the fluctuation of our net worth, but I can also take advantage of this market dip as a buying opportunity to invest any income we earn from passion projects. As Buffett says, “be greedy when others are fearful.”

How are you currently feeling? Fearful or greedy? Do you have any tips on how to avoid investment scams?

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29 thoughts on “How To Avoid Investment Scams”

  1. the money printing finally having its effect. They got to raise rates now. Kinda like pulling the plug.

    party ova for awhile . Mortgage rates may hot 7% + by next crippling consumer spending .

    Fed cant bail the market out , he was part of the problem!!!!

  2. 2015 Bitcoin price: ~$300
    2022 Bitcoin price: ~$30,000

    Phew, glad I wasn’t tricked into that scam.🙄

    1. Nov 2021 $BTC: $67,582.60

      “Don’t buy investments that require you to time the market and find a greater fool to sell to” is in full effect here. Ew.

    2. 2029 Bitcoin price: ~$300

      Better sell now. Be the scammer, not the person who get scammed … 🙂

    3. Would you have made money though? For me, looking back I would mostly like have either lost the hard drive/memory stick the bitcoin wallet was on or forgotten the password. Also how do you know it wouldn’t have been stolen? Many bitcoin exchanges have lost millions to hacks (Mt Gox no longer exists) or you might have accidentally lost it to a phishing scam. $2.5 million in the bored ape nft was just stolen in the past month.

  3. Good call to have stayed away from that scam !

    The best tip to avoid investment scams is to use common sense. If the person ask something that has a lot of value (including “cash” or “work”) and offer nothing in return, including no guarantees, that’s usually very bad.

  4. thanks for sharing

    i was scammed a few years back . by a very legit looking outfit named Bluetrading

    cleverly they would even send your profits back and we saw many people had done this .. this convinced me . hey it was too good to be true

    then of course one day they disappeared . i wonder if anyone has tracked them ?

    we are talking a billion or more

  5. On your question : “How are you currently feeling? Fearful or greedy?”

    I would say I feel normal.

    Last year, I was fearful. I think many investments (including bonds), were extremely expensive. Now, it’s possible to invest in medium term federal bonds for 2%-3%. There are also investment grade corporate bonds that yield more than 4%. That’s not a lot, but that ok.

    Many stocks are getting crushed. And they are not going back up any time soon (Netflix, AirBnb, CoinBase). But many other “sound investments”, like Coca-Cola or Johnson & Johnson are perfectly fine.

    So, if I had cash (I don’t), I would be buying normally. But I’m not rushing in the market at this point in time. I think we are in a very healthy (although painful) stock market correction.

  6. I’m so incredibly cynical ! The result is it’s highly unlikely I’ll ever fall for a scam. The downside to being cynical is that if a legit opportunity were to appear, I would most likely give it a pass because I would convince myself it was a scam.

    …this actually happened to me a few years ago. I had a “private detective” calling/emailing me repeatedly claiming I had money coming my way. I was convinced I was being set up for a scam. I ultimately consulted an attorney. The attorney reviewed the calls and emails, and it turned out I really did have some money coming my way !! Apparently it’s not uncommon for creditors to hire private detectives to locate people who are owed funds. The detective and creditor get a nominal “finders” fee if they locate and payout the funds. If they don’t, then the money goes to California “Unclaimed Property” fund, where it will languish for decades and nobody gets a dime, except the state of California.

  7. If it sounds too good to be true, it probably is.
    I’m greedy at the moment. I’d like to buy some stocks, but no money. Oh well. Hold and hope for a recovery at some point.

  8. I had one friend who was offered a partnership with a slick oil well promoter and turned it down to stay in his pretty good pay oil pipeline company job. The slick promoter went on to make hundreds of millions of dollars. My friend regretted it to the day he died. My son’s college roommate went to work for an unknown start up in 2014. It was called Zoom. That mid-thirties guy now has a net worth considerably higher than yours plus mine plus a dozen of our closest friends. You never know. Sometimes taking asymmetric risks in your younger years pays off. But not often. And never with shady people. Great story! And great advice!

  9. Feeling greedy and fearful at the same time. Loading up on EFTs @ 15-20% below 52-week highs, while aware things might fall (significantly) further…

    Also, having just learned the lesson from the blog post, I found myself trying to apply it situationally, which lead to my questioning another premise in today’s post: “we went to the Canadian Consulate in Chiang Mai, Thailand to request some tax documents for our first book.”

    On the face of it, the above seemed inaccurate (but not a scam). Unless this was for the consular authentication of some Canadian-issued documents one already had in their possession, for use in a foreign country, it’s hard to readily imagine why a (tax) resident of Canada would deal with tax documents for use in a foreign country. Or maybe the sentence quoted was slightly inaccurate, and one was trying to obtain a valid-in-Canada notarization/witnessing of a (tax?) affidavit in Chiang Mai, which may have been incidentally needed for tax affairs back home or for some publisher to release a book advance or royalties with no/less withholding at source [musing over].

    The above is meant to be another example of applying critical thinking to anything you are told, even by credible sources like our hosts–the broader lesson of today’s post. I hope our hosts won’t mind the sample application to the situation they described (and acknowledging it was likely an incomplete account; and that no one has any obligation to discuss their tax or consular affairs; and that they were just providing context to introduce Nick’s story).

  10. Buy something to sell at a higher price to a sucker because it has no cashflows or fundamentals isn’t investing…it’s gambling!

  11. Yes, cryptocurrency scams are a really big problem, but there are fewer of them every year and that’s a good sign. I always read reviews on cryptocurrency portals before investing in a project or before buying software, or I consult with guys in discord. So, I saved myself from buying scam bot by reading review recently. So I strongly recommend everyone not to make ill-considered investments, because you saw a promise in Tweeter that this trading bot will earn 1000% a day.

  12. Thank you for Raising Awareness on Investment Scams. Usually Investment fraud happens when people try to trick you into investing money. They might want you to invest money in stocks, bonds, notes, commodities, currency, or even real estate. A scammer may lie to you or give you fake information about a real investment. Or they may make up a fake investment opportunity and they seem smart, friendly, and charming. They may tell you an investment opportunity is urgent and even they try to earn your trust so you’ll give them money as quickly as possible and without asking many questions.
    If a person faces such fraudulent activity he should must take an action and Report the fraud to federal and state agencies.

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  14. What are the advantages and disadvantages of different platforms for buying Bitcoin, and how can you choose the best option based on your individual needs and goals?

  15. I think we can talk about how different platforms for buying bitcoins have their advantages and disadvantages. Based on my experience in the crypto sphere, I can say that the platform stands out for its ease of use, fast transactions and a wide range of currencies. In choosing this platform to work with my cryptocurrency, I took into account many factors, such as commission, security level, etc.

  16. Investment scams are a lurking danger, preying on unsuspecting individuals. To steer clear, due diligence is paramount. Research thoroughly before committing funds, scrutinize the legitimacy of the investment opportunity, and seek advice from reputable financial experts. Avoid promises of high returns with minimal risk; if it sounds too good to be true, it probably is. Beware of pressure tactics and unsolicited offers. Verify credentials, licenses, and regulatory compliance of investment entities. Stay informed about common scam tactics, such as Ponzi schemes and pyramid schemes. Remember, protecting your hard-earned money necessitates vigilance and skepticism. Stay cautious, stay informed, and safeguard your investments from potential scams.

  17. To steer clear of investment scams, it’s essential to exercise caution and skepticism, especially when confronted with high-pressure tactics or unrealistic returns. Personally I want to invest in my own business. I want to create my own poker site with this software. With all modern features and possibilities I think I can succeed!

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