Rushing is the Enemy of Discernment: How Patience Prevented a $40,000 Loss

scam

I was recently discussing the importance of patience relative relationships with a group of women. We went over some of the sources of failure in relationships and one of the things mentioned is how people often are not who they claim to be. That’s when I mentioned that no one can keep up a pretense forever. With enough times, everyone will reveal their true colors. This then led me to thinking of the time I saved myself a lot of heartache because I did something that was completely against my nature: showing patience in the face of what at the time seemed to be a fantastic opportunity when in reality it was a well-dressed scam.

In November of 2015 I met a Real Estate Broker who offered to take me under his wing. It was a working relationship where he would play the role of mentor and trainer. Everything was going as planned until he made me a new proposition in January of 2016: Investing in a new construction project in a high end neighborhood. According to him, the 4,000 square foot house would sell for $4.5 million, $4 million minimum. He already had the land, which his largest investor put $1 million towards purchasing. He was looking for additional investors to fund the actual construction. He was offering a 10% return on investment for every $10,000 invested. This was the most tempting investment opportunity presented to me yet because at the time, my husband and I had $40,000 in savings. According to him, the project would be complete in May or June and would hit the market in July or even maybe late June. This offer meant that I could turn $40,000 into $56,000 before Thanksgiving.

But there was one problem. The money was not easily accessible. It was parked in a CD that would not mature for another month, in late February. It normally would be a no brainer to break the CD, pay the bank a couple hundred dollars in early termination fees to access the funds and hand them over but I decided  against it. It simply did not make any sense to rush so quickly into a project. It was only a month away and if it was that great of an opportunity, and meant to be it would still be there in 3-4 weeks. I thought that the delay was a unique opportunity to fully evaluate the offer and weigh the pros and cons.

I often hear that patience is a virtue. Thankfully there are other characteristics that are also virtues because patience is not one of my strong suits. But this time, there was something keeping me grounded. Maybe it was how large the sum was. Maybe it was the financial security I was experiencing. Yet, I was in no rush to take the offer. I told him I’d think about it and get back to him. I explained that I not only needed to discuss it with my husband, but that the money itself was tied up. He agreed to wait and the days ticked by.

However, instead of being excited at the new opportunity that was fast approaching, I became increasingly uneasy. The more time I had to think about the project, the less attractive it seemed. Not the numbers, but the circumstances.

A) This man who had been a real estate broker and investor for more than 30 years and has never moved out of his hometown, somehow decided that a couple that he met only a few months ago should benefit from this opportunity. I know that many people will give a stranger a shot, but I think a deal that great should have been offered to and taken up by his friends first. The fact that it was still available to us made me wonder if it was as good as he made it out to be.

B) He gave me a contract outlining the terms of the agreement, claiming the contract was drafted by his attorney, but it was shock-full of spelling and grammatical errors.

C) He embellished/oversold some aspects of the project. While the real estate market in Boston is very strong and there are a lot of wealthy people in the area, a multi-million dollar home is still only accessible to the 1%  and would not sell very quickly. He kept insisting the deal would be done fast and that made me wonder what else he exaggerated and/or straight up lied about.

D) The calls… The bloody calls… He kept calling, texting and emailing asking when the money would be available. I don’t know about you, but I never heard of someone who has a great opportunity that will make someone else money and he has to beg others to take it. It reeked of desperation and made me suspicious. He was contacting me in some manner at least once a week wanting an update. Finally, a few days before the CD matured, I got a “reminder” text about how he’s gathering investors because he needs to move forward and I needed to make a decision.

I did make a decision: I turned him down.

Fast forward to November 2016…

I am waiting on a $4,000 check he owes me for a real estate transaction. Meanwhile I have a lunch date on a snowy Saturday with a mutual acquaintance who happens to be his former assistant where I discover a series of interesting tidbits:

  1. The house had still not been built (months after it was supposed to have been sold). There was only a fence around the land and he didn’t even have building permits yet. There was no money. None. In fact, the temporary fence they normally put around construction sites had collapsed and the company that put up the fence refused to come out and fix it because he had not paid them for putting up the fence in the first place. The extremely past due account made him ineligible for any additional work.
  2. He owed a long list of people money and the sum was astounding:
    1. 5 “investors” from each he took $10,000 for that new construction = $50,000
    2. A commercial real estate buyer $50,000 (that particular deal cost him his license since it was part of a transaction. In Massachusetts mishandling of client funds is the fastest way to get your license suspended or revoked)
    3. A different investor he owed $30,000
    4. Agent 1 he owed $31,000
    5. Agent 2 he owed $20,000
    6. Agent 3 he owed $12,000
    7. Agent 4 he owed $7,000
    8. An other real estate company he owed $5,000
    9. He owed me $4,000
    10. A lumber company he owed $2,500
    11. Fence company (sum unknown)
    12. Wages to his former office manager (sum unknown)
    13. Wages to his former assistant (sum unknown)
  3. There were 3 pending lawsuits against him in 2 different district courts
  4. He had grossly inflated the potential for profit. The new construction would not sell for $4-4.5 million. The assistant herself had worked on the market analysis and said the house would likely sell for $2.5 million, maybe $3 million at the most.
  5. His initial investor who bought the land wanted not only his first million back but an additional $200,000 in returns. With an estimated cost to build of $800,000, he would be in for at least $2 million, not including an additional $125k for commission, $15-20k for staging and marketing. Which means he understated his expenses, and with all the “investors” waiting in line for their 10-50% ROIs, someone was not going to get paid.

Well, it turns out that “someone” really was a whole lot of people. All of his accounts had negative balances and all the checks he began writing to appease people were bouncing. While the land and the project are real, the money he collected from people were really to pay off others that he had swindled in recent years. He had no intention of using the money towards the house. Which means, I wasn’t going to get my money by Labor Day, Thanksgiving or ever. I wasn’t even going to collect $4k let alone $40k or even $56k. In other words, my rare patience making an appearance at that critical time gave me the opportunity to carefully evaluate and reject something that would have been a costly devastating mistake. My decision to wait saved us from being ripped off.

Maybe I should make a meme… I don’t always wait, but when I do, I save $40,000.

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Question Everything

I don’t mean to speak for anyone but I’d like to think that we work hard for our money and we would like to keep it. That’s why I discussed fraudulent investments earlier and some of their tell-tale signs to help you recognize and avoid them. But people can be really crafty when it’s time to con you out of some cash.

If the proposed investment initially passes the smell test, here are three questions you can ask to further pull back some layers and determine the merits of the deal:

Does the dealer have a license? Even with the best of intention, the market has shown that it cannot be trusted to regulate itself. The best way of ensuring that people and organizations are doing the right thing is to have the threat of severe penalties (usually financial) hanging over their head. Unlicensed advisers are illegal and accountable to no one. Furthermore, we do not know what their qualifications are.

Does the risk/reward structure make sense? “High risk, high reward” is a common cliche, but it is true. If someone is offering a low risk guaranteed investment, the returns will likely be very low. The opposite applies if the rewards are significant. The risk is likely to be high and the returns will not be guaranteed. Anything different is likely a scam, or at best it is misrepresented.

Is the investment registered? It is similar to an unlicensed dealer. Who is tracking and regulating the security if it is unregistered? Personally, I do not like to rely on a company that is financially invested in me being uninformed for the truth. Registering a security ensures that the SEC, an independent government organization will ensure transparency by providing you with the necessary information to make good choices.

No Rest for Dead Presidents: My Dollars aren’t Lazy Bastards

What an awful headline. But I’m not feeling particularly creative today so it will have to do.

money

In an introductory investment post, I liken dollars to employees who must work to make my life better. Money has a significant advantage over us when it comes to working and earning potential. We get tired, we need sleep, our loved ones want our attention. Money has none of those conflicts so what reason is there for it to not be working tirelessly to free you from the rat race? In my case, my little dead presidents’ only duty is to slave away to improve my quality of life. Here are some of the ways I make sure they aren’t being lazy little bastards.

I structure my bank accounts deliberately: Some days I can’t even keep track of how many accounts I have. But the complexities of both life and banking regulations do not allow me to simply have a checking and a savings. While I have a checking account for my every day use, that is the lowest yielding account there is. I can’t keep all my money in a checking account. However, the highest yielding bank account is a CD (learn more about CD’s here and here) and there are penalties for early withdrawals. Since emergencies do not wait for CDs to mature, I also have a money market account which provides me with quick access to cash at a much higher rate than a checking but without the potential for a penalty.

I only use cash back credit cards: Your bank is making money off your use of the card, shouldn’t you do the same? My credit card gives me 1.5% cash back on everything I buy and on a monthly basis, the bank runs some specials at various merchants where I get an additional 5-15% cash back. For example, my tail lights went out a few weeks ago. We have both an Auto Zone and an Advanced Auto Parts in our area. However, our credit card company was running a 10% cash back special at Advanced Auto Parts. When it was time for my husband to replace the tail lights, I told him to make sure he went there. He spent $40 and we ended up getting $4.60 back (10% special + the 1.5% we would normally get). Of course, since there is no annual fee and we pay the balance in full every month to avoid interest, we are being paid to use our card.

I get educated: It’s hard to make or save money when you don’t know what benefits or features are available to you. I’ve discussed my solar adventures in the past. We got thousands of dollars in rebates courtesy of the U.S. Government for our investment in solar panels (if you pay taxes, thank you!). Although we would have eventually taken the plunge, we might have missed the opportunity for our big tax credit if we waited too long. There is no guarantee that the program will be available indefinitely or even beyond 2020. We also learned about the energy credits which we are on track to receive quarterly for 10 years. While they are small amounts, they will be offsetting nearly half of the cost of the system. So not only did we get a 30% subsidy, we are also selling some of the credits we produce over a period of time to offset the remaining 70% of the cost. That does not include our actual energy savings which have been pretty substantial (my March 2017 electric bill was $38. I live in a 3,100 square foot house in New England).

I pay debt aggressively: Debt is slavery. It’s crippling because it’s expensive. The best way to handle debt is to get rid of it as quickly as possible. My student loan interest is 5.16%. It makes no sense for me to carry that balance for 10 years (standard repayment) if it’s costing me as much as a moderate investment portfolio would cost. So when I graduated from an MBA program with a balance of $47k and change, I was determine to get rid of it by any means necessary. Two years later, my balance is  $11,600. I have saved myself thousands in interest and the amount that I did have to pay, I have able to deduct it from my taxes. So I have used the money I have in the bank and the money I earned working both my regular job and real estate to cut my balance and reduce my interest.

I keep cash to a minimum: ‘Minimum’ is relative.  It doesn’t mean I only have $1,500 in the bank. I keep a fat emergency fund which correlates with my low risk appetite. The more risk adverse you are, the more money you want available to weather unpleasant unforeseen events. For me that number is a year’s worth of living expenses. Before the recession, the recommended amount was 3 months. After 2008, financial experts were recommending 6 months. I like to be cautious, maybe overly so, thus, I choose 12 months. Anything above that number is invested in various types of projects (or debt payments) that are meant to increase cash flow (or cut my interest expense).

Think of the ways you can make your money work for you. Idle funds are being eaten away by inflation and are not doing anything to improve your bottom line and get you closer to financial freedom. This is the value equivalent of throwing your money away.

Knowing the Investment Products

Investing can be overwhelming. The key is knowing what is available and where to start. There are many investment products. I will list them below and provide a high level overview of some of their features and inherent risks.

INVESTMENT TYPE FEATURES COMPANY BENEFITS BENEFITS RISKS
Stocks Capital appreciation & Dividend payments Capital & Market expansion Growth potential Volatility
Bonds Steady income & Capital preservation Capital investments Predictable returns Interest Rate Risk
Certificates of Deposits Steady income & Insured balances Low cost access to liquidity No risk Low returns
Real Estate Investment Trust Investing in commercial real estate Access to capital Diversification & real estate income Lack of transparency

Most Common Investment Frauds

Fraud

I discussed in a previous post that there are mechanisms in place to protect investors however, we should never under estimate the determination of a scammer. Their most recent successes show that they are innovating just as quickly as the laws are evolving to stay ahead of the regulators. One of the ways that you can protect yourself is by learning to recognize the features of a fraud  before it happens. Here I will discuss some of the most recent and successful schemes that have robbed Americans of billions.

PONZI SCHEME: The fraud is set up in a way that the existing investors’ “returns” are actually payments from the funds collected from new investors. The issue with a Ponzi scheme is that the investment managers do not actually invest the money so there is no return. The dividends being paid out rely on a continuous flow of new investors and eventually, they will run out of new investors, at which point the oldest investors will see their returns decline and the newer ones will never have a chance at getting their money back as the scam collapses.

Some red flags include guaranteed returns (there is no such thing), unlicensed investment managers (no regulatory oversight), inaccurate or inconsistent records (if it’s true the information should be correct and consistent every time).

PYRAMID SCHEMES: We’ve all seen the social media posts of Shakeology/Beach Body, Herbal Life, #shoppingannuity, etc. Before social media, those of us who were kids in the 90s remember our parents discussing Amway. They are old and the concept has not changed. The only thing that changed is the service or product they’re selling. Essentially, the participant offers a service or product, but the key to actually making money heavily relies on recruiting new members. Participation often requires steep membership fees or even low but regular dues that quickly add up in addition to being required to buy the product being offered. The primary emphasis is usually on recruiting as the products being sold tend to be available elsewhere for a more reasonable price, making it difficult to build a consistent client base with it. All pyramid schemes will collapse eventually and most investors except for those at the very top of the pyramid will lose their money.

Pyramid scheme red flags are aggressive recruiting efforts that border desperation (that’s where the real money is), confusing commission structure (why does everyone above you get a cut of what you earn?), no real revenue from product (as stated above).

PUMP AND DUMP SCHEMES: This one is near and dear to my heart. When I first started investing in the stock market at 22, I lost $5,000 in a pump and dump scheme after following the advice of someone I thought was a knowledgeable after he made some good profit on Citi stock. Usually the scammers will tell you they have info (pumping) on this hot new stock, often penny stocks (which is why some brokerage firms won’t let you invest in penny stocks if you don’t mean a minimum account balance). You and hundreds if not thousands of other people invest and the activity drives up the price of the stock. The fraudsters then decide when they get tired of the game or when they have run out of people to contact, they sell their share of the stock (dumping) making big profits right before the price collapses and everyone else who didn’t know better loses big time.

Some red flags you should watch for are stocks that no one else has heard of, stocks that you’ve only ever seen on social media or unsolicited email chains, stocks for companies where little to no financial information is available.

Remember that no one is immune fraud no matter how seasoned or inexperienced the investor is. The key is to stay vigilant and scrutinize every proposal.

Introduction to Investing

Investing

I often talk about the importance of financial independence; at least to me. However you can’t achieve that through working only. Your earning potential is limited as a wage earner and only the most exceptional and/or connected will ever get to a salary level where their earnings alone will make them independently wealthy. So the rest of us turn to investments.

The approach that I take to investment is to look at every dollar I have as an employee. They are supposed to work and be productive. If they aren’t working they are costing me and I need to find an activity for them. But the drawback is finding the right “work site”. I believe that diversification is extremely important. Some of my dollars are doing heavy lifting in the real estate market, some are doing lazy work in CDs and savings and others are doing risky work in the stock market. That is my way of diversifying.

Diversification is an old and basic investment concept. It is a tool used to spread out your risk to ensure that you don’t have all your eggs in one basket. In my case, I use real estate as a mechanism to provide me with guaranteed cash flow since people will always need a place to live. I use my CD and savings accounts to provide me with flexibility and liquidity. Meanwhile, I use my stock market investments as a tax tool since they are work sponsored retirement plans.

My husband finds humor in me saying that investing is fun. But the truth is, the fun doesn’t stem from the process of learning to navigate the market or feeling my stomach drop every time a bad political move causes the DOW to fluctuate or mortgage rates to spike. The fun comes in knowing that even when I sleep, I’m still earning money. When I’m working, I’m earning my wage was well as money from all of my investments. I don’t have to work as hard but I can make more money than the person sitting next to me for the same amount of work.

However, as much fun as it is when you’re performing well, investing can be tricky. A lot of investments, particularly stock market investments are volatile. Not only that, they are also not backed by the full faith of the U.S. government. My CDs are in a banking institution that carries insurance on my deposit up to $250,000. If I put that same amount in the stock market today, I could wake up tomorrow and have it disappear with no recourse. In a best case scenario, I will retire at 62 or 67 with a million dollar portfolio that will give me enough dividends to live on until I die. The goal is to not outlive my investments. But there are no guarantees. And even when I get my way, I’m still going to be subject to both emotional and financial roller coaster rides over the next 30 years.

None of this means that the industry is unregulated. The Securities and Exchange Commission is the agency that oversees investment advisers and enforces securities laws. But they are just there to make sure that the companies don’t get away with committing fraud, not to guarantee your investments. And even with the regulations in place, even the law enforcement safeguards in place do not guarantee safety as you know by Bernie Madoff’s actions. So it is best to know what you are doing and how to protect yourself by being informed. There is a plethora of resources available and I hope to share them with you here.

Mitigating Loss in an Uncertain Time

cure-career-uncertainty

I think everyone will agree that this presidency will be historic. Regardless of how you feel about the person currently occupying the Oval Office, you have to admit that this presidency has not started off very smoothly. Never has an official elected to the highest office in government has been so mired in scandal, lawsuits, and resistance so early. If his unpredictability is not enough to make you pause, maybe the fact that we are in year 9 of an economic recovery might.

Depending on who you ask or what sources you read, economic recoveries typically last 7-10 years. That is the period of time it takes for the market to normalize and peak before it crashes again. Some economists will say that the average is as low as 5 years. So whether you are optimistic, or doom and gloom, you have to admit that we are probably overdue, or at the very least, facing another recession right in the face.

So how do you prepare?

In my case, I am preparing by divesting from high risk ventures. One of the things we investing is peer-to-peer lending. In a booming economy, P2P can be a great way to make money. Personally I used a moderate risk strategy that helped me see relatively solid returns with minimal losses. I was 2 years into Lending Club (LC) before I saw my first charge-off. My LC rate of return was also 10x more that my best CD.

However, even with a moderate risk portfolio, it’s still one of the riskiest investments I can under take. I am making unsecured loans to people I have never met via a relatively new platform in untested industry. While some borrowers verify their income, those loans are rare since all investors want them. This resulted in most of the loans in my portfolio being from people with unverified information, which means that I am relying solely on their honesty to finance the debt.

As much as it pains me to give it up, it will hurt even more if I see another epic crash coming and allow greed to rule my decision. Not only that, unlike the stock market where if you leave you have to buy to get back in and you could potentially be paying more than you originally paid, this is a different format. It’s never going to be more costly for me to get back in the game if things turn out to not be as bad as I anticipated. Since I choose how big of a loan I make, I control my costs and they don’t have to be anything more than I can afford. I am also not losing on growth since my income comes from getting paid back not from market performance. Given that I am not planning on selling the loans I have on the books, I will still be receiving interest income. However, as I get paid, I will be withdrawing my funds rather than reinvesting them. Because, another risk with LC is that the company has not even been around long enough for us to know how it would perform in a recession.

One of the things about LC is that the company earns money by charging the investors a processing fee when they get paid. If most, if not all, the borrowers start defaulting on their payments, that takes away one of their main sources of income. What would happen if LC filed for bankruptcy? We don’t know for sure since there has never been a case like this as the industry is still in its infancy. But if it’s anything like other big companies that have gone out of business, we can look to Lehman and other for an idea of what could happen.

Unlike a Bank of America depositor whose funds are insured by the FDIC, investors are not afforded such benefits. If BoA went into receivership today, everyone would get their money back, up to $250k. Just like any other uninsured investment, a LC investor wouldn’t see a dime. So I do not wish to see my money sitting there waiting for things to get better. It costs me nothing to transfer in or out. So as I get paid, I go in every month and withdraw the cash balance, hoping things don’t collapse around us before I can get the rest of my money. When we either have a more stable administration or we know that we are climbing out of a recession, I will have more confidence to invest in high risk ventures in search for high rewards. Until then, I am pulling back and protecting myself from maximum loss.