Avoiding SCAMS

The last several years, I have seen an increasing number of people defrauded by investment scams, probably made easier because of all the money everyone is making in the stock market. But before making any investment, you should ask the following 10 questions:

1. Is the investment audited by one of the major international accounting firms? Real investments are audited by one of the large international accounting firms; indeed, a real investment will hold this out as a selling point. On the other hand, a scam investment will not be audited by anyone, or by a small firm nobody has heard of (and may in fact be a sham).

2. Is the investment registered with your state securities commission or with the SEC? Real investments must be registered with your state securities commission, or with the U.S. Securities & Exchange Commission. This is true of offshore investments which are marketed to you in your state — they must be registered as well, and avoid anyone who says they are “exempt” because they are offshore. Avoid unregistered investments.

3. Is the investment listed in the Wall Street Journal, London Financial Times, or similar well known financial publication? Real investments will be listed in a major financial publication, or findable in some other major financial resource. You typically can’t find scam investments in these publications. Beware “CUSIP” numbers as an “authentication” of the investment — anyone can get a CUSIP number for just about anything so this doesn’t help you.

4. Is everything about the investment out in the open? Real investments are completely “transparent”, meaning that you can clearly see and understand each and every step of where your dollars go and how they grow. Scams hide or obfuscate one or more parts of the plan, speak in terms of secrecy, may allude to a “secret banking system” or similar nonsense, and might even require you to sign a secrecy or confidentiality agreement prior to seeing the plan (it will almost always be a scam if you have to sign such a document).

5. Are you allowed to seek independent legal counsel prior to making the investment? Real investments will encourage you to seek independent legal and financial advice prior to making the investment. Scam investments will give you bizarre reasons why you shouldn’t talk to someone, such as “CPAs are trained not to speak of this!”, and they may even require you to sign a secrecy or confidentiality agreement which will discourage you from consulting anyone before making your investment.

6. Is the seller licensed with your state securities commission or with the NASD? Real investments are sold by licensed stockbrokers who are registered both with your state security commission and with the National Association of Securities Dealers. Scam investments are sold by scam artists who are not registered with anyone, or perhaps with some phony-baloney foreign stock exchange (or more recently, “cyber-exchange”).

7. Does the promoter have a good background? A real promoter will be “clean” and you can verify this by hiring a private investigation firm to conduct a basic investigation. A scam artist will often be using an alias, and will often have a criminal background (though not always).

8. Does the investment “make sense”? Avoid all unregistered investments which are “guaranteed” as this is a sure sign of a scam (if the guarantee would be real, it would be registered). Avoid investments which make representations which are unusually high, i.e.,funds and programs which promise to pay more than 50% per year, or promissory notes and CDs which promise to pay more than 10% per year.

9. What does law enforcement say about this investment? Don’t hesitate to call law enforcement, such as your state security commissioner or attorney general, before you invest. A real promoter will have nothing to fear if investigated (and can probably clear it up with a phone call). This is just a part of doing business for them. On the other hand, a scam artist probably will not stand up to this scrutiny.

10. Is it too good to be true? If you have to ask yourself this question, it probably is.

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SCAM Alert

When trawling around for investments, you always need to keep a look out for possible scams.

Recently this article was printed in the New York Times. It should send a warning signal to most people.

Don’t you get caught investing in something that simply looks too good to be true WITHOUT going through some of our processes like ASSESSING an investment.

NICKEL STOCK HITS $90, SPURS FRENZY AND SUSPENSION

November 8, 2005 — The Securities and Exchange Commission suspended a speculative frenzy in the shares of little-known Cameron International yesterday, after the stock’s price went from 5 cents to more than $90 in one day.

How Cameron’s stock price got above its longtime nickel price level seems puzzling enough.

The Santa-Monica, Calif.-based company’s SEC filings reveal it had barely $14,000 in revenue, two board members, and was seeking to sell even more stock to raise enough money to hire employees and launch a Web site.

According to its Yahoo! Finance profile, Cameron provided a variety of business and Internet-based marketing services. If Cameron raised $192,500, the filings said, it might generate revenues by the second half of next year.

The SEC’s release added that despite a 1,000 percent gain on Oct. 28, there was “no material information about the company [being] made public.”

After the close of trading that day, the company — which reported $4,000 in assets in June — had a market value of $133 million.

The SEC also said it had not received information requested for a spooky 30-1 reverse stock split, Cameron said on Halloween.

No one answered repeated calls to Cameron’s headquarters.

What’s more, running Cameron didn’t appear to be too taxing on Stephen Samuels, Cameron’s founder, who announced a week ago he was stepping down from the chief executive slot, according to SEC filings.

You may have heard of a “Boiler Room” scam. In fact there was a Hollywood move about this very topic, oddly, called Boiler Room.

Typically, a Boiler Room is a call centre full of people calling target investors. They explain that they are a stock-broker from some firm (sometimes the firm name is VERY similar to those that you might know). They go on to explain how they are selling a special deal, maybe shares in a pre-IPO company and would you like to get in early.

Whatever the story they spin, the bottom line is that some people pay – only to find out later that  the company is now bankrupt or worse, never existed. And all your investor money is gone.

Never buy a stock or make an investment from one phone call. Always follow your process to determine how much you can afford to place, what is it you’re investing in, etc. Good, simple questions.

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How to Build Yourself a Capital Guaranteed Investment?

First of all, what is a capital guaranteed fund? And why would you want one.

If you invest in a typical managed fund, say $10,000. Your money is invested by the fund and may or may not profit, in fact, recent history shows us that your initial money can reduce. After 2 years you might be faced with only $8,000 in your account. Hopefully, your account has gained!

A capital guaranteed fund essentially guarantees that your NEVER lose your initial money. So the fund can ONLY increase.

I’m sure that sounds good to most of you.

Most people like you, use these types of funds to “protect” a certain percentage of their total portfolio.

Most capital guaranteed products have average to poor performance. But, as stated, they don’t lose value.

“What about the capital guaranteed fund with above average returns?” I hear you ask.

Like most things in finance and investment, this strategy is not that complicated and whilst a particular outcome can never be guaranteed, you can put your investment capital into a strategy which has the potential to yield excellent results whilst not exposing your investment capital to undue risk.

Everybody is familiar with bank term deposits, such deposits are as about as risk free investment as you can get. So it is not hard to imagine a scenario where if you placed an amount on deposit after a predefined term you would get a predefined amount back.

If you are in the US, you would use zero-coupon bonds and not bank deposits for this exercise.

For the sake of this example assume you take your $10,000 which can be invested for a period of 10 years.

In this example, at the very least we want to receive our capital (the $10,000) back in 10 years time.

Using a financial calculator or a spreadsheet it’s a relatively easy function to calculate what amount needs to be invested at a certain rate to yield $10,000 at the end of ten years. At this point I would suggest you look a little bit further a field than the average bank term deposit. Obviously the better the rate the less of the $10,000 needs to be invested to get us back to $10,000 over the 10 years.

A couple of products come to mind that will expose your capital for only slightly more risk when compared to a bank term deposit but are yielding around 9%.

So by investing $4,224.11 at 9% over ten years we have our capital guarantee in place.

With the remainder of $5,775.89 we have plenty of options, the purpose of which are to generate high returns secure in the knowledge that in the worst case scenario we will still have our $10,000 back at the end of 10 years.

One option might be to invest this risk portion of our capital in a new mining company listing on the stock exchange in the hope that they strike gold.

Whilst I would never recommend such a strategy for all sorts of reasons you would still get your original $10,000 back if they didn’t.

A more appropriate strategy might be to invest in a high yield managed fund.

For the sake of this example I have picked managed funds because they have easily accessible historical data. If you had implemented this strategy 10 years ago using the Perpetual Industrial Share Fund (http://www.perpetualinvestments.com.au/) for the risk portion of your original capital $5,775.89 would have grown to $24,402.75.

Add this to the return provided by the capital guarantee and you have a total return of $34,402.75 or 13.15% pa.

In other words, that’s 13.15% every year for 10 years without EVER RISKING YOUR INITIAL CAPITAL

Obviously this assumes income is reinvested and the effect of tax, inflation and imputation credits has not been taken into consideration. Everyone’s personal financial situation is different and I would be remiss if I did not recommend that everyone seek their own advice in this area.

So there you have it. Your own, do-it-yourself, capital guaranteed fund which has provided a return of over 13% per year.

Essentially this is what the promoters of all the off-the-shelf capital guaranteed investments are doing without the bells and whistles and without all of the associated costs which seriously impact investor’s (your) returns.

This is just one strategy which you could implement as an independently minded investor.

Oddly, ASIC in Australia is not keen on capital guaranteed funds.  Therefore you’ll need to look overseas for these funds, if you don’t want to make on up yourself.

In Asia, they are THE most popular fund that is available for retail investors.

 

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What is Angel Investing?

Many businesses need capital to grow. Sometimes it is essential to find investors that will offer start-up capital to fledgling companies as they have potential for growth. The investors that provide this start-up capital are Angel Investors. Angel Investors are Venture Capitalists on a smaller scale. Angel Investors tend to provide capital up to $1million and VC’s any amount above that.

What is Angel Investing?

Angel Investing is the process of finding start-up companies and funding the early stages of their development in exchange for a share in the company and percentage of turnover. Businesses often opt for angel investment as the funds do not appear as a debt on the balance sheet. If the business chose to raise capital with a bank loan then if the company fails they are still liable for the debt.

Angel Investors are normally confused with venture capitalists. An angel investor is a passive investor that will fund an enterprise during the first stages of development. They will provide seed capital to companies who have potential for massive growth. Angel investors are normally wealthy individuals and their contributions are anything up to a $1 million. Venture Capitalists generally take a more proactive view of controlling the project as they often provide significant funding of $5 million or more.

Angel Investors make money by claiming a portion of ongoing turnover and also realize a large lump sum gain when the company is sold or floated.

 

How Angel Investing play a part in your portfolio

 

Angel investors can invest in a number of ways; with their own money direct into a start-up company, as part of a pooled fund known as an ‘Angel Group’ or through an Angel Investing Managed Fund.

The target exit time for angel investors is fairly long with a sale of their share coming after at least 5 years. That can seem a long time to tie up amounts around $1million. Angel Investing can be very risky if the correct due diligence is not conducted. As in every kind of investment you should thoroughly research your proposed strategy and make a decision based on the facts. Not on gut feeling or even market sentiment. Markets can change in an instant but solid numbers take time to appreciate or deteriorate.

If you have insufficient funds to directly invest into a business you could join an Angel Group. With a minimum investment of $100,000 you could join an Angel Group and have your funds diversified into a number of start-up projects. This will diversify your investment and you realise a gain that is an aggregate of the group’s total turnover.

If you are not comfortable with having your money tied up for a long period of time then an Angel Investing Managed Fund may be a suitable option. Returns are vastly diluted by fees, failures and by having your investment more liquid.

Angel Investing is definitely worth an investigation as the returns can be very high. The perceived risk of this kind of investment is high but relative to the potential returns, and relative to potential falls that can occur in the stock market, this kind of investment is stable.

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The ONE Thing: The Power of Focusing

New York Times best-selling author Gary Keller says that the secret of every successful person is his or her “ONE Thing”.

The ONE Thing is the ability to focus or concentrate on the specific thing that lies between the individual and his or her goals. This one thing is the very factor that enables a person to hit the bull’s eye in every situation.

The secret lies in this expression: “What’s the ONE Thing you can do such that by doing it everything else will be easier or unnecessary?” This is what Keller calls the Focusing Question that effectively pushes his own real estate business up from one level to another.

To make his point clear, he illustrates this strategy in showing how his company applied it in their step by step ascent to success.

Their first one thing was to think big and recruit people. The people were taught how to generate and be productive. The result was, in three years they got results and became the 10th largest real estate company in their city.

However, they were met with a challenge that they needed to reinvent themselves or else fall out of business. Thus, they sought for the one thing that could they can do to help their associates generate the most amount of money such that everything else they might do will either be easier or unnecessary. After much research and evaluation, the answer was adding a profit sharing program to their compensation plan. In a year’s time, they became the largest residential real estate company in their city.

The story did not stop there, though. Then goes the domino effect of asking the Focusing Question from time to time; such that they were able to make major decisions such as: in order to validate their profit share, they open their books to let their associates see the financials or simply go transparent; to encourage their associates to influence their financials once they read them, they form leadership councils at different levels to empower them with decision making rights; to help everyone in the company work together to achieve more individually and collectively, they develop the right culture; and in order to communicate and deliver their value proposition, they adopt technology.

According to Keller, the Focusing Question has the power to take you where you need to go even when you don’t know you need to go there at all in the first place. This question they made repeatedly through the stages of their business development was able to generate the big answers to the company’s challenges. It shaped their biggest decisions and kindled the growth in their business through all those 30 years.

The Focusing Question can be considered as one of the most effective tools in business; however, by simply formulating it, one has to go through rigorous research and analysis. Once the question is asked, it will take another thorough study and critical thinking to come up with the best result or ONE Thing.

So what is your “ONE Thing” for today?

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