The Next Scam
Every few years there is some sort of financial crisis that comes about because of one person’s ability to fool those who allow their desire for money to cripple their common sense. This was true in the 1930s with insider trading, during the Savings and Loan scandal, and now, of course, with the Bernie Madoff Ponzi scheme. A little over a century ago, P.T. Barnum, a person who put the “art” in scam artist, allegedly said, “There’s a sucker born every minute.” Nothing has changed in the intervening time. Government watch dogs cry, “mea culpa,” and create a bunch of regulations that are designed to prevent that particular form of scam. Then the scammers come up with a new way to separate people from their money.
Two things are common to all forms of scams. One is that the scammers are expert in the art of winning friends and influencing people. They know what people want to hear and they use that knowledge along with whatever personal spin they could add to it. Madoff’s spin was to avoid promising huge returns but instead to promise steady returns on investments. He also created a sense of exclusiveness that had people champing at the bit to get their money into his hands. You were someone if you were in the circle of people investing with Madoff. It’s a really clever scheme, although smart investors realize that the next successful scammer on a large scale will have an equally clever but different scheme.
Secondly, common to all scams is the mark. The mark is a person who wants to make as much money as possible in as short a time as possible. Marks may also have other personal characteristics that scammers can employ, such as vulnerability to signs of status. Unfortunately, these desires and characteristics actually prevent the mark from seeing the signs of a scam. Being allowed in the circle around Madoff was a powerful blinding agent. Marks also do not understand their investments and are not likely to keep careful track of what is happening to their money.
While no one can guess the exact nature of the next big scam, we know that a., there will be one because people are people, b., some aspect of the scam will be new and different even if the overall scheme is as old as the Ponzi scheme, and c., people will be taken.
To avoid being taken, individuals must avoid the characteristics of marks. Because Madoff’s circle was so exclusive, people didn’t want to make him angry and get kicked out of the circle. So they often did not inquire as to his investment strategies and how those could be so consistent in a volatile market. Investors can avoid scams by separating out investment strategies from personal friendships, by being sure of how an investment works (and being prepared to take a critical look at the investment), and by being patient about gains instead of in a hurry. Another scam will happen and people will be taken. Yet there will be people who successfully avoid the scam. That’s the exclusive crowd to join.
