Lessons to be learned from 2008

We can now look back on 2008 and see what we have learned from it. This has been a year of major change and economic instability offline and that may have added to the inherent instability of online programs.

The Scam of the Year
2008 has also been the year when the biggest scam to ever occur came to light, and it was offline, in fact on Wall Street. This was a Ponzi scam run by Bernard Madoff, which resulted in the loss of $50 billion. The perpetrator was well known and in fact had been chairman of one of the 2 stock markets in New York. Money was lost by very experienced investors and fund managers, not by gullible and untutored investors. They were investing with someone who was well known, had an excellent personal and financial reputation for many years, and who had held a very responsible and public position. There are accusations flying about insufficient or inadequate due diligence having been exercised, of SEC inaction and of lack of follow up of complaints made over the past few years. In any case many of those who invested the most with Mr. Madoff (funds and investment groups) were those who were in the best position to find out what was going on and should have been the most cautious, partly due to the staggering amounts they invested (literally billions) but partly due to the position of trust they held managing money for many investors, charities, trusts and retirement programs. Mr. Madoff did not seem to favour anyone, but rather scammed all comers. There has already been one suicide blamed on the losses resulting from this scam.

The moral of this story is that it is probably impossible to avoid getting taken in by a scam in all cases. Even exercising reasonable care will not always prevent us from becoming involved with a scam. This is a very important lesson since it teaches us that we will sometimes lose money, no matter how careful we are, and even the SEC will neither prevent it from happening nor assist us when it occurs. The only thing we can do is accept this as a fact and protect ourselves by doing as much due diligence as we are able, and then diversifying into as many of the safest programs we are able to handle. That way, when we lose, it is only a portion of our capital and it can be replaced from the earnings of out other programs.


Online Scams
It is difficult to say whether there have been more of these than in previous years or not. In any case, it just seems that way, particularly since many have been clustered in the second half of the year. I listed many of them in a prior post.

In a sense, it is easier for scams to occur online since there is no direct contact between members and programs and it can be more difficult to accomplish due diligence, and it is also potentially easier to present false "records" and "proof" than offline. This just makes the task more difficult and the risk of getting involved with a scam greater.


Where do we go from here?
When you get sick after eating, you may in the future avoid the food you ate or avoid eating at the restaurant you ate at, but you do not stop eating.
In the same way, when you lose money to a scam, you try to avoid making the same error the next time and avoid programs run by the same scammers. But you also pick yourself up, dust yourself off and go on. You are trying to build a passive income for yourself, so you keep your eyes firmly fixed on your goal and keep striving toward it.

Despite Mr. Madoff, it is still a good idea to personally meet, or question individuals who have personally met, with those running the major programs we consider getting involved in. These are the programs in which we invest 20% or more of our capital. It may not be practical to do the same thing with programs in which we only put small amounts of money. Generally speaking, someone who has a long history of reliability and honesty as well as of concern for others, usually will continue behaving in the same fashion.

It is a good idea to pick a program which communicates readily with its members, although this is not foolproof either (but then NOTHING is). We have seen Tradelite which communicated promptly and readily with its members--until the day it disappeared. On the other hand, a program which does not communicate readily with its members is likely to only get worse and therefore should be avoided. Even if good communication does not prove anything about a program, poor communication is a red flag.

It is important to try to document the source of the revenue of the program, check whether the owners have had previous programs and what happened to them, and where the program is located and make sure that the physical address is real and is theirs. This can be difficult depending on what country the program is located in.

Generally, Ponzi scams do not last very long and rarely last more than 12 to 18 months (there are exceptions as Mr. Madoff proved) therefore it will usually be safer to choose a program which has been operating and paying consistently for at least 2 years.

Lastly, it is best to use at least 3 to 4 major programs, these are programs in which we put at 20% or more of our capital and several other programs which are minor programs in which we put 5% to 15% of the capital, the amount put into each depending on the degree of perceived risk of the program (generally the minor programs will be those perceived as being higher risk).

We will get into programs which will turn out to be scams, it is one of the risks and it is part of the cost of doing this type of business. Offline, businesses often pay for advertising which is useless and results in no business getting generated because it is in the wrong place or at the wrong time of year or is the wrong type of advertising. This is considered to be part of the cost of doing business. This is money lost just as surely as the money lost when it is put into a scam program. When it happens to you, just see it for what it is--part of the cost of doing business.


Scam Versus Incompetence
Scams do occur and they are the result of an individual purposely stealing funds from others. While there are many scams, there are also many programs which fail due to poor planning, incompetence, just plain mismanagement or simply a good program at the wrong time so that it never 'takes off'. These are programs run by good people who have no intention of stealing anything from anyone, and may even have the best intentions possible of helping others. In a sense these are more dangerous since due diligence will show nothing wrong.

These programs are harder to avoid but whether we lose money due to a scam or due to a bad program it is still just part of the cost of doing business. Just continue on your quest and do not let your anger at your loss cloud your judgement. Keep remembering your goal since that is the only thing that really matters.