Another day, another dollar …or should that read another day, another investment fraud exposed. On Tuesday the United States SEC froze the assets of Allen Stanford and three companies in his Stanford Financial Group. You can read the SEC press release here. Significant and sustained bear markets always expose the fraudsters and charlatans of the investment world. What is surprising in this current recessionary environment is the scale of the frauds perpetrated by such high profile public figures such as Bernard Madoff and Allen Stanford. Madoff was a former Chairman of the NASDAQ and Stanford courted the media with his cricket ‘benevolence’.
The details of these massive frauds will be picked over with a fine tooth comb over the coming months. What is immediately clear is that investors and particularly their professional advisers, should have heard the warning bells long before the frauds were finally exposed.
The regulators will never be able to prevent a determined fraudster from concealing their actions for a while, and investors should always understand that the best defence is to follow the well know maxim…caveat emptor, buyer beware. There is a simple test which I advise all investors to consider before following any investment advice or making an investment.
- Is there a sound theoretical basis for why an investment strategy will be successful going forward?
- Is there clear empirical evidence of how the investment strategy has performed historically?
- Can the concept be practically implemented to generate the theoretical returns available?
Surprisingly enough, few investment strategies pass all three tests. Making investment decisions within such a framework will also help investors filter out potential fraudsters and steer clear of schemes such as Stanford’s, which according to the SEC offered:
“…improbable and unsubstantiated high interest rates, supposedly earned through its unique investment strategy…”
Schemes that sound too good to be true invariably are.
Email Christian Ward 
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This is for information purposes only and you should always seek professional advice
