You, too, can be conned

I made an enemy this week.

She is the widow of an old friend.  Before he died, I promised to try to look out for her a bit.

During our recent conversation she said I made her feel small.  She said I made her feel stupid. There were tears. I’m very likely guilty on both counts.  I’m not always tactful.  But, hopefully, I saved her two million dollars.

Her husband died a while back.  Over the years he worked hard and had acumulated the aforementioned $2,000,000.  He loved his wife dearly and he knew he would very likely leave her a widow.  The money was an act of love.  He wanted to be sure she would be financially secure.

But he also knew three things that scared him no end:

  1. His wife believed in the “free lunch.”  That is, she was always open to come-ons.  Free cell phones were an example.  Every time their cell phone contract expired the provider offered a “free” cell phone which she proudly grabbed.  Somehow she seemed to miss the two year contract it locked them into, over and over again.  While small potatoes, it is a bad sign.
  2. The world is filled with predators looking for precisely people like her.
  3. Money and this belief in the “free lunch” attracts them like sharks to blood in the water.

It was this topic that set me off and brought her to tears.  I was trying to gently coax her into appreciating the risk.  She is a very bright woman and seemed to understand.  But then she said, “Don’t worry.  I can’t be conned.”

“With that you have,” I said (and by this point my voice I fear was raised) “just violated the first rule of not being conned!”

Make no mistake.  You can be conned.  So can I.

Here’s one I came across many years ago.  Fortunately I read about it.  In those days, I might well have taken the bait.  Here it is:

One day you get a letter, or maybe these days an email.  In it, an investment advisor introduces himself and  offers you a stock tip.  ABC Corp is going to dramatically rise in price over the next week or two.  Don’t invest, he cautions, without doing your homework.  But his proprietary metrics are pointing to this one as a strong buy.

You’re no fool but you decide to maybe keep an eye on it.  Just to see.  Sure enough, it sharply spikes up.  You could have made 50, 60, 100% on your money in a just couple of days.  Damn.  Letter 2 arrives.

This one says, BCD Corp is poised to take a sharp fall.  Our metrics, it says, say short (shorting is  a way to sell stock you don’t own on a bet it will decline in price) this stock.  You are a careful investor.  Again you decide to watch and see, although with a keener interest now.

Sure enough, this one collapses as predicted.  Had you acted, big profits would have been yours.

Letter #3 arrives.  Then #4, #5 and maybe even #6.  Each is dead on.  The stock rises, or falls, exactly as predicted.  Maybe you even took a chance and profited from one or more.  Hard not to be impressed by now.  I would be.

Then you get an invitation to dinner at one of your area’s finer restaurants.  You and a hand full of other “executive level investors” are invited to an informal meeting with Mr. Hasn’t-Missed-One-Yet.  He’ll be discussing his proprietary investment metrics and how they’ve made him rich.

At dinner, Mr. HMOY is soft-spoken.  He is warm, kind and concerned.  He has all the trappings of wealth, but in a tasteful, understated fashion.  Charts and graphs are presented.  The exact investment approach is unclear, but then it is proprietary.  This is to be expected.  Oh, and barely mentioned in passing, it just so happens a couple of slots remain open in his latest investment pool.  There is certainly no obligation but, of course, “based on our experience” they will be snapped up by tomorrow.  So, if you are interested….

Can you see the trick?  (and like all magic, it is a trick) If you can and this is the first you’ve come across it, you are a better man than I.  But don’t get cocky.  If not this one, there’s another that will fly under your radar.  In can happen to you.  Fail to understand this and it will.  That’s the first rule.  Here’s the full set:

Rule #1:  Everybody can be conned.  Certainly stupid people are marks.  But so are the exceptionally bright.  The moment you start to think that it can’t happen to you, you’ve become a most attractive target.  The easiest victims are those that think they are too smart, too knowledgeable to be taken.  This means you, bucko.

Rule #2:  You are likely to be conned in an area of your expertise.  The reason is simple:  Targeting and Ego.  When con men pick a scam they look for people to whom it will naturally appeal.  Those are people in the field.  People feel secure and safe in those areas they know well.  They believe they will be too smart to be caught unawares.  Smart people know the areas they don’t know and tend to be far more cautious there.  Most of Bernie Madoff’s victims were financial professionals.

Rule #3:  Con men (and women) don’t look like con men.  This isn’t the movies.  They’re not going to have slouch hats pulled low over their shifty eyes.  Successful con men look like the safest, most trust-worthy, most honest, most stable, most comforting people imaginable.  You won’t see them coming.  Or rather you will, and you’ll be warmly welcoming them.

Rule #4:  99% of what they say will be true.  The best, most effective lies are surrounded by truth.  Buried in it.  The con, the thing that will leave you broke and with a real reason to cry, is carefully hidden.  It is deep in the proverbial fine print.

Rule #5:  If it looks too good to be true, it is.  There is no free lunch.  Not ever.  Your Mama taught you this.  She was right.

Listen to your Mama.

Of course, not all cons are clever.  An email from a Nigerian stranger offering you, random old you, millions to accept his money transfer should be obvious.  Right?

The stranger knocking on your door and offering cut-rate home repairs because we “just happen to be working the the neighborhood” if only you pay in cash up front, is a con man.  You know this.  Right?

Those are the kinds of simple cons my friend’s wife was thinking about, and she’s right.  She is much to smart to fall for those.  But those aren’t what had her husband worried.  It is the Mr. HMOYs of the world who seek out the smart, the rich and the lonely.

If you have not already done so, have these conversations with your own spouse.  Don’t leave it to a tackless (although honest) friend of the family like me.

Given the actuarial tables and her good genes, my own wife will likely also outlive me by a couple of decades or more.  Since I handle our investments, we have this conversation on a regular basis.  We review what we own and why.  Fortunately, she understands the principles and their importance.

As an aside this is one more reason I’m a fan of index funds.  I want to leave her with a simple portfolio she can leave on auto-pilot.

So far these discussions haven’t lead to my making an enemy of her.  Yet.  I think.

How’d he do that??

Investment scams are so common, and successful, that even the Canadian Government has set one up as a cautionary tale.  2-Cents shares it with us here:

http://balancejunkie.com/2012/03/12/what-you-need-to-know-about-online-investment-fraud/

Oh, and if you know how Mr. HMOY did it, post it in the comments.  If no one does, in a week or so I’ll add a post script with the answer.

Update:  Aaron nailed it right out of the box.  See his comment below.

Addendum: Here’s a story of a near-con from James Altucher

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