Archive for June 2023
How My Mom Was Scammed
Posted on: June 20, 2023
This article is a sequel to my last article about how my mom was introduced to a “great” investment opportunity by someone she trusted in her church. If you have not read that one, read it first. At the end of the article, I asked my readers to guess how much money my mom got back.
Here is the answer: she lost more than 90% of her money.
In the first three months after she “invested”, she did receive the promised 3% monthly interest on time. No doubt she shared her good experiences with others and may have even encouraged others to “invest.” She was then persuaded to reinvest all her interest income to make her money grow even faster. After a few months, the so-called brother in Christ stopped coming to church and seemed to drop off the face of the earth. In the end, my mom got just 9% back out of about $50k she invested. My mom is not uneducated, she was an OBGYN doctor. She still fell for the scam. So today I want to discuss the telltale signs of judgment manipulation by scam artists.
Trust shortcut
Trust is extremely hard to build. It takes years to earn a stranger’s trust. But scammers are experts at winning trust. Here are some of the trust triggers they like to pull:
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It happened when she still lived in China. One day she telephoned me, saying that a friend from her church told her about a fantastic investment opportunity. A brother in Christ had an ingenious business idea; he would buy water ponds, set them up for fish farming and sell his daily yield to restaurants for profit. He promised great returns. To get it going, he needed to borrow money with an annual interest rate of 36% (or 3% monthly.) He also wanted to keep this lucrative opportunity exclusively for fellow believers. My mom’s friend further testified to her that she had invested $10k and had already received her monthly interest, which she promptly invested back into the enterprise upon advice of this fellow Christian.
I told my mother to stay away from such a scheme since it made neither economic sense nor incentive sense – see my previous article.
My mom countered with these arguments:
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I got a message from a physician client of mine who wanted me to evaluate a real estate deal that was supposed to give him a 32x Return in 10 years, tax free. Note that the promised return is not 32%, but 32x, meaning that if one were to put in $400k today, he would get back $12.8mm in ten years. The proprietors of the deal explained it in a 90-minute long video message that was uploaded to a popular video platform. The proprietors further shared that there were only very limited spots left for investors to take advantage of this awesome opportunity.
Let’s ignore the “tax free” claim for now, since that usually has to do with investments in qualified opportunity zones, about which I have previously written an article. For now, I am primarily interested in thinking through the economic possibility of achieving the 32x return. The video explains that they double their money every two years by investing in multifamily units. (Buy and renovate for $400k, then sell for $800k.) By compounding their income over five two-year periods, or ten years, they achieve a 32x return. It’s simple as that. The proprietors have done it themselves, and the wife of one of them is a mathematician – she has confirmed the compounding formula: 2^5 = 32.
Now I am not a real estate expert, but this level of returns does not make economic sense to me. Here is how I explained my misgivings to my client.
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The Investment Scientist 