Sent: 27-03-2006 07:37:29
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What is Risk - 2 - Lester Wills
Continuing with my series on risk, this week I focus on greed.
Greed is good was a phrase that was spoken by Gordon Geko (aka Michael Douglas) in the 1980's film Wall Street. It became synonymous with activity on the stock markets during 1987, and in a number of the excesses since.
But was Gordon Geko right?
Peter Kell, formerly a Director of ASIC gave a presentation about Risk and the Consumer not long ago. During his talk Peter commented that there is a need to explain "risk" to investors, as many do not understand what it is and consequently fall into all sorts of traps.
ASIC reported recently year that approximately 6000 people lost in excess of $400 million to market scams over the Internet in one year. He went on to explain that this was a conservative estimate as it included only those who actually reported the scam. Many do not for a variety of reasons, embarrassment no doubt being one of them.
These scams were predominantly out of Asia, using western people. Unfortunately all too many victims were willing to "invest" in these companies, where there was a promise of a quick and massive profit. It appears a number quite happily transferred money and/or sent cheques to mysterious locations. In some instances the sums were not insignificant. I am talking millions here.
So who were these people who all too willingly parted with their hard-earned money. Surely they would be people who were not that sophisticated, wealthy perhaps, but not well educated?
Absolutely wrong. ASIC conducted a survey and found they came from all walks of life, were of all ages, locations and occupations. They included highly educated and professionally trained people such as doctors, academics and even accountants!
The really interesting thing was the justification people gave.
They were diversifying their portfolios; they were investing in new technology or the environment etc. The normal risk factors were simply not picked up. The fact that the dealers were not licensed (one wonders if they even asked, not that it would have mattered I suppose) and the fact that the return on offer seemed too good to be true (which it was).
Add to this the reasons given for those that did not invest. Many said that the only reason they did not get caught was because they did not have money available at the time to "invest". In other words, they would have done if they could, as it seemed a great opportunity.
In all fairness some of the scams were very sophisticated. A few of the victims did some checking and found that the companies mentioned were real companies who's shares could be bought and sold through the US OTC market. ASIC suspects they were specially set up shelf companies. Some even had professional looking web sites and when the "investor" took the bait; they could even get some official looking glossy documentation in the post. The most "professional" did not initially ask for money, this tended to come later.
To be honest, if anyone has seen the film "Boiler Room" they will know that such operations can be quite refined with people trained to deliver a really hard sell.
The real issue is that once such "investors" have been burnt, they are unlikely to trust any financial advisers in the future. Not only that, they are likely to influence others to do the same, which makes the job of the real advisers so much harder.
One interesting thing that emerged from the ASIC research was that a particular word did not seem to be mentioned. Greed it seems did not enter into the picture. Greed, being one of the seven deadly sins is something we are all guilty of at some stage in our lives. In such situations we need to step back, take a breath and take a dispassionate view of the situation. Unfortunately when greed takes over, that simply does not happen.
So was Gordon Geko wrong. It would appear that too many, whether they like it or not, greed is not good, it is god!
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