Beginner’s Guide Part 3.2: Avoid rip-offs:

Whatever platform you will choose, avoid a rip-off. A rip off is when you will pay a lot of fees for you to invest or exit a market. Too many costs will deplete your capital. Also, avoid Ponzi Schemes and scams in general. Sometimes, it is not that difficult to spot a scam or a Ponzi scheme.

At some point in my life, I joined a “scheme” knowingly because I thought I would beat them at their game. I miscalculated. The scheme closed off two days ahead of my anticipated exit time. I did not suffer big financial losses because I had put in what I was comfortable to lose. But, I plead with you, do not assume that you can be smarter than the people making these schemes or scams. Just stay away.

So, what are some of the red flags:

1. High investment returns with little or no risk. You know they say the higher the risk the better the returns. But, a Ponzi or pyramid scheme could offer you very high returns with very little or no risk assumed on your part. In most cases, all you need to do is bring in new members, put in your money and wait until you get your return. Some of them are presented as trading or investing robots.
2. Difficulty receiving payments: You are told stories when you want to withdraw money or it takes forever for them to process your payments and often it is because they are waiting for other inventors to put in some money. Sometimes they tell you that you can only withdraw a certain percentage of your gains/capital. Do some simple Google (Duck Duck Go, Bing…whatever search engine you use) searches or see what people are saying on Facebook or Hello Peter. This can save you a lot of money and trouble.
3. Secretive and/or complex strategies: My simple rule of thumb is “stay away from anything you do not understand.” If you are a scooter driver, stay away from trucks. And if the people asking you to join or invest cannot explain what they are doing or what you are investing in, that is usually a red flag too.
4. Unlicensed sellers: This is important, check if the platform is registered and legit. I once wrote about a tender scam that came my way and how I managed to pick up that it was a fraud. You can find it here.
5. Guaranteed returns: This is where the creators of the fund/scheme promise you a definite return. They tell you that as long as you invest, you will get returns. However, the truth is that in investments (maybe except for government bonds,) returns are not guaranteed.
6. Consistently high performance: We sort of covered this one already. But, remember most investments did not do so well during this pandemic yet some platforms still showed or purported that they were still making high returns. This should make you very sceptical.
7. Suspicious or vague business model: Stay away from anything you do not understand. Do not convince yourself that the model will make sense as you transact on the platform. If you cannot understand the model after a 5-minute explanation, run with your life.
8. The pressure to find new investors: Ponzi schemes survive by continually attracting new investors. Remember, by definition, a Ponzi scheme is one where the founder robs one person to pay another and eventually keeps some of the money to themselves. If you are continually asked or pressured to look for new investors, that should be a sign. Another sign/red flag is there is pressure on you to invest and to invest now.
9. Credibility through association: Most creators of these schemes will even take from their family and friends. When you look at this you are lured into investing because of the perceived credibility created by this strategy. But, the truth is that these people are not even scared of stealing from their families and friends.

As I was planning this post, I came across a more recent fraud scheme. In this scheme, the fraudsters were purporting to be collecting investments from one of the JSE listed companies. I have seen adverts on youtube where people invite you to invest in Netflix or Amazon and the likes. But, this one was close to home and was attempting to take advantage of the war between Russia and Ukraine. if you have time you can find it on Moneyweb. And I hope you have not already fallen victim to this fraud scheme.

Next week, as we continue with our discussions on capital, we will look at available capital and opportunity funds. We want to understand what these are.

Are you learning anything from this series? Do you want to share any pointers or experiences? Please leave a comment.

We grow together!