Emotions can lead investors into schemes

By DAVID MOON, Moon Capital Management, LLC
March 8, 2009

A couple of weeks ago, the Securities and Exchange Commission obtained a court order that halted the operation of an alleged Ponzi scheme targeted specifically toward deaf people.

In its complaint, the SEC alleged that Marvin Cooper held seminars at events catering to “members of the Deaf community.” He is then alleged to have perpetrated an old fashion Ponzi scheme, using most of his investors’ funds to pay for a new home and other personal expenses.

Sometimes the affinity group upon which a charlatan preys is the membership roll of an exclusive country club. Maybe it’s people from church. This is the first time I’ve seen people targeted based on a medical condition.

Given the high-profile nature of the new scams that seem to be uncovered each week, it might seem that investors would be less likely to fall victim to these types of deception in the current climate.

I’m afraid that’s not true.

People make the worst decisions when they are emotional. This is true whether the emotion is greed or fear. For most of the last 20 years, investment scams have propagated based on the lure of huge returns.

Bernie Madoff, however, apparently attracted investors by promising – and appearing to deliver – annual returns of only about 10 percent.

The Stanford Group, accused of running an $8 billion fraud, built its charade around presumably safe certificates of deposit.

In each of these cases, one of the primary appeals to investors was safety, or more accurately, the appearance of safety.

Old-fashioned Ponzi schemes typically promise returns like 10 percent a week, not 10 percent a year. What could there be to worry a presumably conservative Madoff investor?

Plenty, we now know.

When combined with the fact that Madoff and R. Allen Stanford both enjoyed high-profile reputations in many circles, certain types of individuals became sitting ducks.

With the stock market now having given up a dozen years worth of gains, I’m afraid there may be more ducks lining up to be shot.

When a person’s emotions take control of decision making, they are more susceptible to being manipulated. Madison Avenue understands this.

That’s why beer commercials show attractive young people in swimsuits rather than middle-age guys with beer bellies. Logic tells me that Bud Light won’t make me any more attractive or cause college girls to flock to my house for a Super Bowl party, but Anheuser-Busch spends millions to keep that hope alive.

When driven by emotion, we are much more likely to ignore logic and make decisions that are clearly not in our best interest.

As you face the losses in your stock investments, keep that in mind. The next Bernie Madoff isn’t likely to promise the Holy Grail to great riches, but rather the secret to avoiding the pain.

* * *

Last week’s column seemed to suggest that people should borrow as much money as possible on their homes in order to take advantage of federal mortgage assistance programs. The piece was intended as satire. That wasn’t obvious to all readers.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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