Catastrophic Downside

From last week - “gambling is a kind of financial bungee jumping - an asymmetric risk. Maybe a bit of a kick in the short term, but very little chance of making money consistently and potentially catastrophic downside if you do it often enough.”

Which got me thinking, some activities just naturally offer the potential for a “multiple of zero” outcome. Such activities are probably just best avoided.

Much as I may love to go wing walking, following a cold-eyed logical assessment of the upsides (a bit of fun) versus the potential downsides (death) - it makes very little sense.

Show off. Image credit: Shutterstock.

So what are some potential “zero multiple” financial activities?

Gambling, scams, fraud, “to good to be true” investment opportunities. Anything that promises to offer a shortcut to riches without putting in the legwork basically.

Having spent a few days out of the office last week I had a little more opportunity to be on social media than I usually do, or is to be recommended frankly. And I was pretty depressed by the number of obvious scams I came across.

Here is one kind - various high profile financial personalities promising access to daily investment opportunities if only I join “their personal WhatsApp group”.

Here’s a tip. If some incredibly successful investor or entrepreneur appears to be offering the general public access to their best investment ideas ask yourself this one simple question - if this person has in fact “solved the market”, why on God’s green earth would they share that information with me or any other normal person?

They wouldn’t of course, for two reasons:

1. No such code to “crack the markets” actually exists; and

2. Even if it did, these people would absolutely keep it for themselves and chill on a beach somewhere.

   
   

This stuff is not even hiding in the shadows, it is chilling in plain sight. The tech platforms 100% know this is going on and yet they choose not to do anything about it. Why?

Because the people flogging this snake oil must be making enough money to pay the platforms some serious dough. It can be the only answer.

Image credit: Shutterstock.

Here’s another kind of scam. So called “legitimate” businesses which prey on folks’ ignorance to make as much coin as they can.

Take “Winchurch Services” for example.

When you first take money from a pension, HMRC will usually apply an emergency tax code to the payment, meaning you will overpay tax on that withdrawal. And we can be talking about large amounts.

Winchurch’s pitch is that they will contact HMRC on your behalf to arrange any refund you are entitled to. For the perfectly reasonable and not at all egregious sum of 35% of the tax refunded.

While not illegal, this kind of predatory behaviour makes me furious to a cellular level. It is the financial equivalent of a mechanic conning a customer by making up a load of problems that don’t exist.

Reclaiming tax overpayments on a pension withdrawal is a five minute job. It is a simple form and can be done online. Please don’t pay this shower of charlatans 35% to get your money back.

Of course, no matter how repugnant this kind of behaviour is, it pales in comparison to outright fraud.

In “The Psychology Of Money” Morgan Housel tells the story of Rajat Gupta.

Born in the slums of Kolkata, Gupta rose to prominence (and great wealth) as a businessman. By 2008 Gupta was reported to be worth $100 million, and he had retired by his mid forties - “keeping his hand in” by sitting on the board of five public companies. One of which was Goldman Sachs.

In 2008, during a Goldman board meeting in the midst of the financial crisis, Gupta got wind of the fact that Warren Buffet was going to invest $5 billion into the bank to help it survive.

This was valuable, non public information. And as such, after the meeting ended when Gupta decided to call up his mate Raj Rajaratnam to tell him to buy 175,000 shares in Goldman Sachs - he was doing something very illegal.

And this wasn’t an isolated incident either. Gupta’s insider trading led to $17 million in profits. Safe to say, when the authorities found out they weren’t best pleased.

Here is a bloke who overcame overwhelming odds to become mind-bendingly wealthy. No-one on the planet could deny this man their respect for what he had achieved.

And yet…he felt compelled to keep rolling the dice because no matter how big the number was it was never enough.

Roll the dice enough times, you’ll eventually come up with a zero. Reputation shredded, off to jail do not pass go.

All of this leads us to two fairly depressing conclusions about human nature.

One - a fairly substantial cohort of people would happily sell their granny for a few quid. And two - an equally substantial group of people are so greedy that they are happy to disengage from any common sense they might possess when presented with a “once in a lifetime opportunity”.

If it looks like a duck and it quacks like a duck, it is a duck. I am afraid to report there is no such thing as a free lunch.