The Investment Scientist

A Lesson From a Client: Celebrity Business Gone Bad

Posted on: August 9, 2013

ImageA client of mine is trying to get his money out of an ill-conceived investment. I want to share this with you so you don’t make the same mistakes.

In 2009, he had a windfall of $1m. He asked a lady who had sold him a bunch of annuities where he should put his newfound cash. He further told her he was already up to his neck in annuities so he wanted to take some risks.

The agent pointed him to a celebrity business. Basically, some hollywood celebrity was trying to start an online gaming business, and needed $30m to do so.

My client went to their presentation and was mesmerized by the income projection. Then, when he saw that one of his relatives was a minority partner in the venture, he was totally sold. He signed a check for $1m on the spot.

He might as well have flushed it down the toilet.

Here is what he did wrong.

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1. Asking for advice from an agent. These people are legally entitled to a kickback for the people they con. My client will never find out how much of his $1m went to his agent to pay for her “advice,” but I can guarantee that it’s not a small number.

2. False Trust Trigger #1: Celebrity. This is well researched; please read Robert Cialdini’s book “Influence”. When people see a celebrity, they lower their guard. That’s why companies use celebrity endorsements. Apple has an endorsement contract with Yao Ming in China. Yao Ming is an NBA player, he doesn’t know shit about electronics. No matter! His endorsement sells Apple products. Likewise, hollywood stars don’t make gaming ventures more likely to succeed, but they sure make people fork over money to fund them!

3. False Trust Trigger #2: Affinity. This is also well researched; people fall for their same kind. Italian Americans fell for the Ponzi scheme, because Charles Ponzi was Italian. Jewish Americans were made off with left and right because Bernie Madoff is Jewish! I am not saying my client’s relative is conning him, he is likely a victim himself. I am just saying: don’t go into a venture you don’t understand just because your relative’s in on it.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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