Dan Dobry

Things to look out for when investing

Things to look out for when investing

Investment professionals and Institutions could see you, the customer, as sheep to which they will regularly take the shears. Likewise, the executives with whom you do business are largely if not wholly motivated by commission.

Remember usually when investing, you are on your own. In a perfect market you would use a broker, or other qualified adviser, whom you pay, to find the most suitable investment solution aligned with your life goals at the best price. In this hypothetical situation, the market would be transparent, in the sense that you would know exactly what you were buying and what the cost was.

Too little of this exists in real life. In fact, most brokers still live off the commissions that they receive from the companies to which they direct business. They are not really working for you, the consumer; they are in business for the convenience of the institutions they represent. Nor is it easy to discern in any given transaction, although you are given the numbers, what part of your investment is being taken by the financial institution concerned, and how much is being properly invested on your behalf.

As this is our reality, I have prepared here a list of things to look out for (red flags) when investing.

When negotiating an investment always request everything in writing, if the counterparty claims the investment can’t possibly be communicated in writing in a simple format, then I would pass on it.

If the person offering the investment says that their investment is “guaranteed” that is like saying there is a “bomb” on an airplane, anyone with a year of experience or any education on regulations knows this is not possible as all investments include risk, even a bank deposit can default as the liability sits on the balance sheet of the bank and if the bank defaults the deposit could be lost. The probability of this happening in a regulated Western Bank is small but it has happened in the recent past.

If there are “Proven wins but no mention of Losses” beware, financial schemers will be quick to pull out figures to show the earnings they’ve received. But what you’ll want to look out for are their losses too. After all, while a past profit looks good on paper, it isn’t so impressive when their losses are greater than their yield.

Demand transparency in profit and loss statements should you get a sales pitch that only shows a positive track record. Even if the investment sounds safe, it might not be in your best interest to work with someone who chooses to cover up information like this. Who knows what else they could be shielding from you.

Beware Real Estate or Debt Funds that present amazing past performances. There is always the question of what is included in the NAV (Net Asset Value) they present. Especially after a financial event have the defaults in the portfolio been included in the valuations. Have the decline in asset values been included?

Beware secrets that can only be unlocked with a fee. Spotting a self-proclaimed wealth guru is easy. They’ve all found the secret to attaining riches and are willing to let you in on it. But only if you’re willing to fork over a handsome sum for their discovery.

Save the few hundred dollars you might spend on them, and I will tell you the secret: “There is no secret”. While many of the gurus could be investors themselves, a good portion of their wealth likely comes from selling an investment strategy that probably exists for free on the internet.

Beware pyramid schemes: Investments that base most of your profits on you recruiting friends and family to sign up for you to make money quickly.

Be on the lookout for promised commissions you could be earning if your own referred contacts enlist their own pals to join as well. These are all telltale signs of a pyramid scheme.

Beware unregulated Professionals and platforms, or professionals who cannot prove education or certifications. People call themselves fancy impressive names such as financial analyst or advisor but are they qualified? What did they study, how did they acquire their knowledge? Where did they work? Beware of fancy self-given names that have no content.

If someone offers you the opportunity to buy into a project for instance they say, “they are buying an island to develop a resort”, run the other way. The larger the project is, the more amateur the person hawking it is, and the more imaginary the project may be in my experience. There are many $1B projects which are excellent, but the greatest deals are $1M-$100M or $100m-$500M, which are real, direct to the owner, etc.

If a professional is insulted if you request an agenda for a phone call to review materials before investing, move on.

If you are treated rudely, or being rushed into a decision, or the person you are talking to seems stressed, my advice is to move on.

If someone uses ethnic slurs, derogatory language and has the poor judgement to say things that are offending to anyone stay away.

If the person offering you the investment uses a Gmail or Yahoo account or similar, does not have a website, email signature and has not invested the small amount to create these, he is not taking himself seriously so why should we?

If the person offering you is not focused on his offering and has many alternatives in addition and mixes you up when discussing, you may not want to work with him as he may be a “Jack of all trades, but a master of none”.

If you do not understand exactly the investment and how it works in the first ten minutes and the investment is too complicated to understand my advice is to stay away.

If an email or offering looks like a high school essay and is super long or difficult to understand, then don’t bother even reading.

About the Author
Dan Dobry was the founder and a director of the GlobalNET Investment House, he was one of the founders of the Union of Financial Planners in Israel (UFPI) and served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and was a member of the Committee for Standards and Qualifications for the European Union (SQC) until December 2021.
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