I don’t know about you, but I receive unsolicited offers to “get in on the ground floor” of all kinds of investment opportunities on a regular basis. These offers often arrive in my mailbox, my inbox, my Twitter account, my Facebook page, and sometimes on the windshield of my car when it’s parked at the mall. It seems like everybody’s selling something, and nothing is what it seems. I usually toss them out without a second thought, but every once in awhile something catches my eye and I feel compelled to read the marketing pitch. So how do I avoid getting drawn into scams, frauds, and pump-and-dumps? I ask myself three questions:
- Does it sound too good to be true?
- What is the source of this sales pitch?
- What’s the downside?
The first one is pretty easy to answer. My rule of thumb is that any pitch that specifically claims that I can double, triple, or quadruple my money if I act fast and get in before the rest of the world wakes up and discovers this hidden gem, gets tossed immediately. Specific numbers like “this stock is ready to explode higher, producing gains of 1,000% or more for early investors!” are another deal-killer for me.
The second question is a little harder to answer for most people, but just as important. Always remember that there is no such thing as a mass-mailing or blast email that will “get you in on the ground floor” of anything. The source of these pitches is almost always an obscure, vague-sounding organization that I’ve never heard of, and won’t show up on a Google search. The address is almost always a PO Box.
Finally, consider the downside. Be prepared to lose your entire investment, just as you would in the lottery. But at least when you play the lottery, you know that your chances of winning are almost non-existent. That’s why most of us only bet a buck or two. The thrill of hitting it big with a small bet is very attractive and not at all harmful to our overall financial health. But when you invest in a penny stock, or an oil well, or a chain letter, you’re probably going to have to put up at least a few hundred bucks. That’s too much of a downside for me, especially when the odds of making money are probably smaller than they are for winning the lottery.