A lady came in my office years ago to ask my advice. She had invested a large sum of money into a program that was paying her a rate of return far in excess of what would be reasonable. It was immediately clear she had gotten into a Ponzi scheme. This type of fraud occurs when future investor dollars are used to pay high returns to prior investors. Money just circulates but there is no real product. Eventually the scheme comes crashing down when there is not enough new dollars to keep up with the payments to investors. Many Ponzi schemes successfully run for years because investors are often content to see their “gains” merely posted on a monthly statement rather than delivered to them physically. If too many ask for actual redemptions the scheme will fail.
In the case of this lady I was shocked to find out that she was perfectly aware she was involved in such a scheme. She said that she got in early and her goal was to try and get as much money out as she could before it came crashing down, and oddly wanted my opinion on when I thought that might happen.
This individual was not an investor but a speculator, in the extreme. Investors look to buy something today whose value will increase over time. Speculators hope to buy something today that they can sell at a higher price tomorrow, with inherent value being secondary or even insignificant. They often don’t even care what the investment is. A good example of speculation is the currently explosive Bitcoin market.* Six years ago you could buy a Bitcoin for 8 cents. Today, and this changes by the minute, they are selling for over $4,000. As more people have been asking me about Bitcoin lately, my first question is, “Can you explain to me what a Bitcoin is?” Very few have been able to give a good answer.
Bitcoin mania, with all its media hype, appears to me to be a symptom of a potentially bigger problem. I see a growing number of investors who are starting to talk and act more like speculators. Rather than looking for value, many are looking only at what they think tomorrow’s price might be. Historically markets have often soared and crashed when this speculative attitude manifested itself.
Many who are buying Bitcoins and other speculative investments may laugh at me all the way to the bank if they happen to get lucky, but I am an investor, not a speculator. I would rather miss out on a big gain, than risk my hard earned assets in unwise speculation. They say in flying that there are old pilots and there are bold pilots but there are no old bold pilots. I feel the same way about investing. There are investors and there are speculators. Some may have a thrilling ride today, but I prefer to be the one who lives to enjoy tomorrow.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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