Another property investment company A2A Capital was being put on the investor alert list by the Monetary Authority of Singapore (MAS). The company marketed a land-banking scheme with investment in the United States and Canada that promised attractive returns of 134 percent or potentially 3 times the initial investment over 10 years.
When the Singapore investors did not receive the promised payout, they filed police reports against A2A. It was discovered that the property firm has a paid-up capital of only $100 when it set up in 2009. And its office has already moved from Raffles Place in Singapore to the Philippines.
Common traits of scammers and their victims
I just read two good books on financial fraud: Rodney Hobson’s The Book of Scams and Kenneth Fisher and Lara Hoffmans’ How to Smell a Rat: The Five Signs of Financial Fraud.
Fisher and Hoffmans reminded us that frauds tend to be exposed in a bear market. It is because downturns make it difficult to attract new investors. And new blood is badly needed to feed the scheme in order to pay off the previous investors. Without the injection of fresh fund, the whole system will soon collapse.
In my book No B.S. Guide to Property Investment, I talked about how people invest under ignorance, greed, fear, insecurity, kiasu and herd mentality. Con artists get their ways because they can successfully exploit the weaknesses of human nature.
Hobson had a very good summary on the characteristics of scammers and their victims.
In the case of A2A Capital, a 72-year-old retiree first invested $27,000 and got his principal and 110 percent return back after one year. He continued to invest $300,000 of his savings but has never heard back from the company since then.
A2A is obviously deploying a “confidence trick” here. The trick works by first gaining the victim’s confidence, usually by offering the opportunity to make a profit, before defrauding on the victim.
Another 78-year-old invested a total of $500,000 (originally set aside for the studies of two grandchildren) but received only one payment of $1,500.
Hobson explained that scammers tend to target the elderly because they are:
• More trusting;
• More easily frightened;
• Less likely to think clearly;
• Less likely to remember details;
• Less likely to ask for credentials; and
• Less likely to complain.
7 tips to avoid being scammed
Ponzi schemes require constant feeding of funds to keep the system running. So it doesn’t matter whether you have a few thousands or millions of dollars to invest. You are still vulnerable to scams and are likely targets of fraudsters.
However, you can’t be a victim if you don’t relinquish your power to someone capable of making you a victim. To “immunize” yourself from being victims of scams, you have to take the driver’s seat to educate yourself and be always on high alert.
Below are seven tips shared by Hobson on how to avoid being scammed:
1. Be less trusting and more cynical. Be suspicious when approached by strangers, especially those who cold call.
2. Be ready to challenge any story you are told, especially if it sounds improbable. Look at the details and think about where there is a catch.
3. Be wary of seemingly free advice. Someone usually ends up paying so make sure that person isn’t you.
4. Be particularly wary of any scheme that offers guaranteed high returns. If it sounds too good to be true, don’t even think about it.
5. Be prepared to miss out rather than take a risk. Don’t let the scammer play on your vanity.
6. Don’t feel you have been left out when friends boast about great schemes they have joined.
7. Never rush into an investment. The more you feel pressurized, the more you should resist.
Hobson also highlighted 4 things investors should take note:
1. Do not invest in anything you do not understand.
2. Check whether there is a reasonable certainty that you will be able to sell the assets when you want to cash in.
3. Buy and sell through a well-regulated exchange or well-known and respectable dealers.
4. If you are conned, do not throw good money after bad trying to rescue your investment.
How to identify con artists
A2A had been promoting questionable high return investment schemes since 2009. It was not until March 23 this year that MAS alerted the public about the problem of the property firm.
Fisher and Hoffmans said it best, “That regulators didn’t catch these swindlers earlier is a pretty good indication that you can’t count on them to protect you. Only you can protect you.”
In my earlier blog post “Can’t answer these 5 questions? Stay clear of crowdfunding”, I summarized crowd investment plans in Singapore that went sour. I also pointed out the “5 critical questions to ask before taking the plunge”.
Fisher and Hoffmans went deeper by elaborating a few situations that investors should smell a rat:
1. Promising extra high return which is out of this world
The best interest rate from my banker for a fixed deposit is 1.25 percent for this month. That is what banks can guarantee you with close to zero risk.
If someone tells you that an investment scheme can pay you 10 or 20 times, ask yourself these questions: How do they do it? How do they do it continuously? How do they do it during market downturn?
There are many hidden implications and risks that are not shared openly with investors. Soon they will be unable to honor the promised payout. And you can be sure that they can only do it two ways: go bankrupt or run away.
“Someone selling you market-like or better returns with no downside is almost certainly a con artist.”
2. Trying to impress with a nice office and expensive toys
One A2A investor was impressed with the company’s large, well-decorated office in Raffles Place. He decided to invest $50,000 after the professional marketing presentation there.
“Fancy offices, expensive toys, and corporate and personal bling are a red flag. If they aren’t meant to distract you, at the very least they distract the adviser.”
3. Trying too hard to sell a real-life story
Stories sell, especially if they tell you that it is their own life story.
“Be skeptical of fanciful life stories. These are easily faked.”
“Many money gurus suffer from a Paradox of Practice. They teach one wealth equation while getting rich in another.”
Check the company’s history and the founder’s background. If there is a discrepancy, contradiction or white lie, it should ring the alarm.
“Someone who’ll tell a white lie about their past will tell a bigger lie with your money.”
4. Making unnecessary efforts to build a good reputation
A good reputation is easily bought. Con artists can easily build a steller reputation by:
• Making large charitable donations;
• Being active politically; and
• Pandering to affinity groups.
“Don’t rely on reputation alone. Just because others you know trust the person doesn’t mean you should.”
As an investor, it is your responsibility to do the due diligence. It is your choice whether you want to take the driver’s seat or being driven around by others.
Seven ways too difficult, how to be sure. Try sticking to following 4 way tests :
1. Are you as an ‘investor’ able to evaluate the ‘credit risk’ of fhe firm you are giving your hard earned money to? How can you be sure ‘he’ won’t run away after taking your money? Are you so trusting of giving your money to any Tom, Dick or Harry? Are you convinced by any assurance that your capital will be returned to you?
2. Are you able to have full recourse to get all your money back if things go wrong? Is it a bank or financial institution or investment firm properly regulated by MAS? Is it a listed entity governed by SGX Ltd.?
3. Do your investment with such unknown firms have any liquidity? Or is it more likely that once you are invested and ‘departed’ with your money, there is no secondary market or transparent way to get your money back other than to be at the firm’s mercy?
4. Are you able to verify the business model being touted to you as ‘investor’? Does the business model make commercial sense in being able to provide you with the promised gains and returns of your capital invested? Do you understamd the investment model bring promoted?
If any answer to above Q is NO, than you better watch out and avoid at all costs !
Good luck !
Thank you for this insight and other great articles you have published. It is a very timely reminder.
I tried to build a longer term financial model on what I can expect as my ROI based on historical averages for private property in Singapore. Some assumptions I made:
1) From 1993 to present, the private property index has doubled (if I used 1995 it would look far worse) which means an average capital appreciation of ~3%. Rental yields in the past 15 years has been in the range of 3-3.5% excluding the firesale of 2008
2) Home loan rates will increase by 1.5% in the next 5 years to reach SIBOR average of 3%. My annual expenses including property tax, maintenance, insurance, commission etc. would be $54,000 increasing to $66,000 in 5 years to reflect SIBOR increase.
3) For a $1M condo my total expense will be 282,600 including stamp duty ,legal, some renovation etc.)
With above assumptions, I get an annual return on investment (ROI) of 5.4% over 30 yrs assuming I have the tenacity to hold that long and not react to other peaks and crests. Unless I manage to uncover a gem of an undervalued property, these are the long term returns I should expect. This is lower than the historical returns of buying an index based fund like the US S&P 500 or even the Straits time index which over a longer term have yielded 8% p.a. including dividends without the hassles of leverage and property ownership.
Please advise if I am thinking about this logically, thank you.
Raghu.
Property investment, though less volatile, is quite similar to stocks. The entry and exit points, what you buy and at what price, are very important.
In 2000s, my strategy is to maintain not lower than 5 percent net return of my properties. Also, the magic of leveraging means my capital of 20 percent deposit is multiplied 5 times when the value of my properties doubles after holding them for 6 to 7 years.
It doesn’t worth my time to enter the market now if I don’t see returns are comparable or better than my 1st propety portfolio.
Just gotta wait for next major recession! Kekekeke!!!
The irony is that when it’s the “best” time to buy, almost all will suddenly not think it’s the “best” time anymore …. becoz everybody will be praying they won’t lose their jobs. 🙂
Moral of the story is to get a civil service job if you can …. then you can invest big time during recessions & financial crashes “without fear or favour”. Kekeke!!!
I had an ex-colleague from Burma who was getting 5% MONTHLY “interest” from micro-lending in Burma. I think he loaned $12K to a syndicate for 1 year. The monthly $600 was enough to pay for his rental, utilities and food. The loan was repaid back every 12 months, and then another tenure was made with maybe different interest payout. I think he did this for about 2 rounds. He admitted it was high-risk & basically prepared to lose the principal. From the sound of things, the business was also possibly the gangster loanshark type. So ultimately the high returns had to be based on something probably illegal & maybe even severe consequences on others too.
There are many ways to make money. I run a property club and have met many people who earn their pots of gold from different sources.
At the end of the day, it boils down to your personal values. You know doing something can make good money, but you will never do it because that is against your values.
Honestly, 5 percent return is really not worth it … if you know the kind of underground or black money being washed down the bank accounts in foreign countries.
Haha it was 5% per month, so 60% per annum. But he was coy when I asked how those villagers could pay such a high interest rate. He shrugged and said those syndicates have their “ways” and he didn’t care how they did it as long he got his monthly 5%.
Thank you. Just to confirm your threshold of net return of 5% is cash over cash return from year 1 ( Rent- annual expenses (mortgage, maintenance, tax etc.)/(Purchase price i.e. downpayment + stamp duty etc.)?