13 QUESTIONS TO EVALUATE AN INVESTMENT THAT'S "TOO GOOD TO BE TRUE"

We want to get rich quick, ideally with no money down. There are people who claim to have unique solutions. That's what we want to hear and believe. Think of the investments marketed in rented halls.

The results will sound possible and even probable. That doesn't mean they are.

Look for what’s left out.

The easiest way is by figuring out what you want to know in advance and how you (or others) got fooled before. During the presentation you'll be bombarded with information presented in a compelling way by people who seem like experts. Your past experiences give you an anchor.

Questions

Here are some questions to ask yourself before investing.

1. What does Google say?

If a web search shows little from independent sources, how can this be? So much is online these days. Why hasn't a journalist or financial blogger written about this amazing opportunity before? An old adage reminds us to stay silent if we can't say anything nice. That's true for writers too.

The promoters probably have a website. How complete and informative is it? Do they answer common questions or ask you to meet them in person or attend a live event? How many exclamation points do you see? Do you spot any obvious mistakes?

2. Do you understand the offer?

The easiest way to tell if you understand something is by explaining it to someone who wasn't there. You'll quickly discover how much you don't know and the questions you have.

Is the investment strategy different from classics like buy-and-hold or buy-low/sell-high? If so, there's more to understand.

3. What are the credentials of the team?

You may get the impression that the team did great things and their ideas are endorsed by reputable others. Perceptions aren't reality. Maybe they worked at well-known firms but didn't do anything worth mentioning.

Are their names, photos and backgrounds on their website? Are they on LinkedIn with credible testimonials?

If they are special, they'll show up online. Maybe you'll find a photo of them receiving the Nobel Prize for sheer brilliance or getting knighted by the Queen by elevating humanity to new levels.

4. Are they giving specifics?

An apple is much like an orange. They're both fruit with similar sizes and shapes. But they're different too. Without specifics, you won't know what kind of fruit you're getting. We share 99% of our genes with mice but the 1% that differs --- about 300 genes out of 30,000 --- does matter.

Presentations are designed for emotional impact. Details are better covered in the handouts. There are handouts, right?

5. What’s verbal vs.. visual vs. handed out?

Talk's cheap and easy to misunderstand. The presenter implies and you infer. There's rarely recorded proof of what was actually said. That's why you need handouts with enough information to make an educated decision. 

Even simple, low cost offers like a movie ticket discount have conditions. The fine print takes away from what you think you're getting.

6. Do they fully answer questions, skirt around them or defer them?

You're probably watching a well-rehearsed presentation with words, examples and gestures selected for maximum impact. Questions give the audience control. The answers give valuable insights.

A question deferred is a question unanswered. You may forget, or time may run out. Some presenters  intentionally use up all their time so they don't have to reply.
Contentious questions get rephrased. Sometimes the presenter will skip over someone whose questions they don't want to hear. They simply point to another part of the room and asking "Is there a question over here?"

7. Do they truly explain the downside risks?

If there are no apparent downsides, be very wary. Risk accompanies reward. Results may look guaranteed because of past performance but that's not a predictor. Is the price of gasoline today what you or the experts predicted? What about house prices, the dollar, the stock market?

We're routinely surprised and unprepared when the highly unlikely keeps happening.

Maybe you infer there are guarantees from the government or other parties. How real are the promises, what do they protect against and when do they apply?

8. How are they making money?

If the investment is so wonderful, why are they advertising and renting halls to tell strangers? They could easily use their own money or raise funds from conventional sources. They probably have nice, plausible, rehearsed answers.

9. Where are the competitors?

If the investment idea is new, you might be a guinea pig. If the idea is established, there's usually competition. Attendees talk. Even brilliant one-of-a-kind ideas get copied.

10. Are quantities limited? Is this a limited-time offer? Are prices about to go up?

If you're ready to invest today, at least find out what happens if you change your mind. That might change your mind. Maybe you can pay with a post-dated cheque. Maybe you "forgot" your credit card and must pay later. Those are possible delaying tactics.

The same presentation will likely be repeated in the same location or nearby. The same offer will likely be made then.

11. Why are they charging rather than giving the ideas away for free online?

Some presenters claim to be altruistic. They want to help you the way others helped them. They're not "in it for the money". Great. They can share their ideas online in text, audio and video. Are they? They'll reach more people at no cost (especially if they add a Facebook Like button).

Just because you know how to do something doesn't mean you will. You may still need or want their help to buy the investments.

12. Who’s the target audience?

Some investments target people who are easily manipulated, have bad credit or have little money. That's not a good sign. How did you find out about the event? Was it from source wealthy people also use?

The target group also determines the location (low frills to fancy), refreshments (none to nice) and seating (cramped rows or tables with water, candy, paper and pens).

13. How do you get out?

If you invest and want to get out of the special opportunity, can you? Must you stay invested for a certain period? Are there penalties? Is your investment liquid? Can you borrow against the value of your investment?

Sober Second Thought

When you mix emotions with a smattering logic and a desire to believe, you get a dangerous concoction. Before acting, do review the ideas with your independent tax advisor. If you don’t have one, ask yourself what Warren Buffett would do and think about why.

Like it or not, risk accompanies reward. Maybe you don’t see the risks or believe they're likely. That doesn’t mean you're safe. Sorry.

Links

• Who is easily manipulated? (Seth Godin, May 2010)
• The fine print taketh away
• Secrets to billionaire success
• Too good to be true: the Real Estate & Wealth Expo
• Observations from the Toronto Franchise Show
• How an actuary invests
• Three reasons the rich get richer
• image courtesy of Rore D (France)

Podcast Episode 67 (8:23)

Direct download | Internet Archive page

PS Feel free to add more questions