Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, December 5, 2010

There’s a Sucker Born Every Minute

P.T. Barnum’s quote, “There’s a sucker born every minute”, provides a great lesson for all investors, yet few people seem to learn. Barnum was an American showman, businessman, and entertainer, known for promoting celebrated hoaxes. He founded the circus that eventually became the Ringling Bros. and Barnum & Bailey Circus. It’s somewhat ironic that, according to Wikipedia, the quote was not actually attributable to Barnum, himself.

Just last week, The Sarasota Herald Tribune carried an article discussing the fourth Ponzi scheme arrest in the Sarasota, Florida area in recent times. Ponzi schemes typically provide the promise of uncommonly high returns to investors. Early investors receive “returns” funded by the contributions of newer investors. The scheme is usually uncovered when one or more large investors ask to liquidate their accounts (often in a down market). When they don’t get paid, a red flag goes up and investigators step in.

This recent alleged scheme drew hundreds of people to seminars, which according to the Tribune’s article, “were run like religious revivals”. The article went on to say that “they (the alleged perpetrators) used religion to make people feel, No.1- Safe, and No. 2 - To exploit them emotionally”.

According to the article, one of the attendees stated: “Not only did I pay for the seminar; I paid an extra 25 bucks for a lousy breakfast, so I could meet the guy. Quite honestly, he sounded like a creep, but I invested anyway, because it sounded too good.”

We often tell our readers and clients that if it sounds too good, it most likely is. Keep in mind that higher returns virtually always bring with them higher risk. In the case of Ponzi schemes, the risk is ultra high. A French proverb states “Skeptics are never deceived.” And Charles Dickens once said in his novel “The Old Curiosity Shop” (1841), “It was a maxim with Foxey – our revered father, gentlemen – ‘Always suspect everybody’”.

The lesson here is that when you hear of higher, guaranteed returns, you need to get suspicious. You need to be skeptical and do some serious due diligence. If you don’t, you’ll run the risk of being the next sucker to get taken by the latest, flashiest Ponzi scheme.


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