How to identify an investing scam, according to the author of 'Millionaire Teacher'

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  • In “Millionaire Teacher,” author Andrew Hallam explains how to spot an investment scam.
  • He got sucked into one himself once, and says too-goo-to-be-true returns are usually just that.
  • He advises sticking with reliable-but-unsexy index funds for consistent returns.
  • Consult with an advisor to make sure you are doing everything to grow your wealth in this challenging time »

For all the good advice that’s out there when it comes to building healthy money habits, one skill that I feel might be underappreciated is learning how to resist bad advice. (Or at least, advice that isn’t a good fit for you and your circumstances.) Lucky for us, that’s the subject author Andrew Hallam chose to wrap up his massively helpful text, “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.” 

The ninth and final chapter of his book teaches you how to “Avoid Seduction,” and while that terminology might sound overly dramatic at first, given that we’re talking about finances and not romantic intrigue, it turns out to be right on the money. (Pun very much intended.)

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Even smart people get suckered into scams now and then

Hallam opens the section sympathetically, sharing the story of his own worst investment to show just how easy it can be to talk yourself into a get-rich-quick scheme. For him, it was a company called Insta-Cash Loans, which was offering a jaw-dropping 54% return on investment. Hallam held out for a while, reminding himself — and his friend who was invested — that if something seemed too good to be true, it probably was. 

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But after watching his friend receive the promised return year in and year out, even as he boosted his original investment from $10,000 to $200,000, Hallam felt his resolve weakening. He not only invested himself, but convinced friends and his investment club to do so as well, buoyed by the years of success he’d witnessed.

Hallam lost a lot of money to an investing scam

As you may have predicted, Insta-Cash Loans founder Daryl Klein had been using cash infusions from new investors to pay out the “interest” for his existing clients, and Insta-Cash Loans went bankrupt in 2006. It was a fairly textbook Ponzi scheme, and Klein was convicted of breaching the provincial securities act and forbidden from any trading until 2026. 

Hallam, his investment club, and the friends he had convinced all lost their initial investments, and many others lost everything. But what he gained was a crucial reminder to trust your brain instead of your gut. 

Hallam knew better than to jump at a too-good-to-be-true opportunity to earn easy money, but that voice got quieter in the face of his friend’s successes. He heard what he wanted to hear, even when it defied all logic. The punishment for that optimism was swift and brutal, and it caused Hallam to look far more skeptically at opportunities, claims, and advice going forward.

Investing red flags to watch out for

Across the board, Hallam advises readers to look closely at what is being promised. If a company, a fund, or even a broker is claiming to have a bead on interest payments that are double or triple what you’re seeing elsewhere, assume something is fishy.

Here are just a few of the investment “opportunities” Hallam urges readers to reconsider.

Stock pickers who claim impossible returns

Hallam chose one stock picker in particular to investigate for “Millionaire Teacher”: George Gilder, who penned the “Gilder Technology Report.” That publication touted Gilder’s peerless stock-picking ability, claiming his selections had netted jaw-dropping 155% returns over the previous three years.

That would be incredibly impressive if it were true and repeatable, but unless you held the stocks during the time they were on the rise, it doesn’t mean too much. Hallam discovered that in reality, if you’d invested $40,000 into Gilder’s top bets for the year 2000, that money would have shrunk to a paltry $1,140 by 2002. 

Stock newsletters that boast perfect track records

Next, Hallam tackled newsletters, which do similar types of selective boasting. According to a study by Duke University, 94% of stock newsletters went out of business between 1990 and 1992, which they’d hardly be likely to do if all their picks were accurate.

Around that same time, “The Hulbert Financial Digest” followed 160 different newsletters, and discovered that in 2001, just 10 of them beat the index, which Hallam notes puts the odds of beating the index by following the advice of a newsletter at less than 7%. And since newsletters at large can hardly advertise that their failure rate is 93%, they have to find — or sometimes straight-up fabricate — other stats to put in front of potential subscribers.

By and large, these claims go unaudited, so stay skeptical and do your due diligence.

Financial publications that may have conflicts of interest

Like any print outlet, financial magazines rely on a combination of paid subscribers and advertisers for their income stream. That can create a conflict between what’s best for readers and the interests of advertisers, who are incentivized to sell their mutual funds and other investment products. And with the financial viability of the magazine at stake, there’s no guarantee that you, the reader, are going to win that tug of war.

Hedge funds that don’t deliver

Finally, selective reporting bias even applies to some hedge funds. Sitting out of reach of the average investor, their unattainability makes them that much more compelling. But Hallam urges his readers to avoid seduction and stick with unsexy-but-reliable index funds instead. Hedge funds are largely unregulated, and voluntarily report their results, which is the first step on a very slippery slope. 

Some of the stats you won’t be hearing about? The fact that 75% of mutual funds go out of business within a decade (which means their poor results vanish from the database, leaving the average success rate unfairly inflated), and that their crushing expense ratios and fees mean they rarely come close to the index. “According to hedgefundresearch.com,” Hallam writes, “during the 13 years ending August 31, 2015, the average reported hedge fund averaged a compound annual return of less than 1%.”

What to do with your money instead

Obviously it’s your money, and that means you’re free to take on any risks you like. Hallam’s only hope is that you look before you leap.

Hallam compares it to taking an experimental route when hiking a known path. If you’re aware of the risks, and understand that your deviation from the proven path could just as easily be a rock slide as a shortcut, then by all means, go for it. But if the sun is actively setting and you need to get back to your car pronto, you probably don’t want to add any unnecessary risk to your journey in a moment of panic. 

In those cases, It’s always better to stay calm, put your head down, and just keep putting one foot in front of the other so you don’t lose your way.

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