Sunday, January 4, 2015

Are Scams in a Sector a Good Indicator of an Area of Great Investment Opportunity?

By Robert Wenzel

I see there is a new theory out there that if you see scams occurring in a sector it means it is an area of great investment opportunity.

The theory goes something like this: In an area where there is great opportunity, scam artists flock to the area to take advantage of those looking for the opportunities in a sector.

Is this true?

Should one be looking at areas just because it is filled with scam artists? Not quite.

Scam artists operate in areas where there is a lot of dumb money. They look for people who don't know how to evaluate investments and who will act on emotions, without really understanding the facts.

We have all experienced scam emails from "Nigerian princes" who need to stash $100 million plus with us, because we have been referenced to these princes as "trustworthy, honorable" people. What these scam artists are looking for is dumb people. And because scam artists are operating in this sector, it does not mean there are good investment opportunities with honest "Nigerian princes." It's all flako stuff.

This doesn't mean scam artists can't operate in areas where there is real opportunity, but that is not what the scam artists are looking for specifically, they are looking for any area where they can tell a whiz bang story, to get those who just aren't good at analyzing investments, to jump in to their crackpot scams.

From time to time, there may be opportunities in areas where there is a lot of enthusiasim, but the real investment opportunities are in sectors where no self-respecting scam artist would operate. If there is no enthusiasim for an investment, the scam artists aren't going to go near it, and probably no one else is either, It means you are likely to be able to buy with very little competition (translation: low prices).

I can recall in the early 1980s, two real estate stocks. One was Alexander's, which was controlled by a family with the ungodly name Farkas. The stock was trading for around $6.00. The department store chain was decrepit and barely surviving, but the real estate on which the stores were on, was worth a multiple of the then price of the stock. But in order to understand this, you actually had to look at the financials, do some addition and division, far from the work that anyone falling prey to a scam artist would do. And look beyond the name Farkas.

If you hung out in any bars in NYC, during this period, you would have likely run into me singing the praises of this stock. After my going on about this stock for perhaps 20 minutes, you would have turned away from me thinking I had a problem. Boring deals, even when they are sure layups, especially when the family behind it is named Farkas, aren't not going to catch a lot of investment attention from the investment masses.

Around the same time Alexander's was trading at $6.00, another stock was about to start trading, Rockefeller Center Properties, which was a complex investment vehicle tied to the notorious scammers, the Rockefeller family. Under extremely bizarre conditions owners of Rockefeller Center Properties could, if I recall correctly, end up owning the properties. But the rent increases that were required for this event to occur, would have been so steep, and unlikely, that it would take really dumb money to think it was going to happen. But, with the Rockefeller name attached, the dumb money poured in. The investment structure of Rockefeller Center Properties eventually collapsed, with clear title to the properties reverting back to the Rockefellers. The stock trades no more. Never trust a billionaire bearing an investment opportunity, unless you know you are not dumb money and understand how you have an edge over him.

As for that stock in the 1980s concurrently trading at $6.00, Alexander's, Donald Trump eventually started buying into it at $60.00 per share and the stock closed on Friday at $440.46.

Looking for where the scammers are is not a very good way to find sound investments. The key is to learn how to evaluate the financial merits of investments.  Generally, the best place to find them is where scammers and few others are going. Read Warren Buffett's ideas on investing. He is a crony capitalist now, but he is still great at analyzing investments,  The books by Mary Buffett, who was once married to Warren Buffett's son, are very good books on Buffett's investment style, Here is a list.

Peter Lynch has also written some very good books on stock analysis. That list is here.

As for the proposition: "Look for areas where there are a lot of scam artists." It is being applied to the Bitcoin arena now, where there is a lot of enthusiasim and there are a lot of scam operators. Buffett took  the emotion out of Bitcoin and analyzed it correctly when he said:
Stay away from it. It’s a mirage, basically. … It’s a method of transmitting money. It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? Are money orders? You can transmit money by money orders. People do it. I hope Bitcoin becomes a better way of doing it, but you can replicate it a bunch of different ways and it will be. The idea that it has some huge intrinsic value is just a joke in my view.
He is pretty much correct (but I don't think it is as anonymous as he implies).  Further, the blockchain technology may have application in areas outside of money that will cause it to act as a timestamp and verify all kinds of documents, but it is not money. When it comes to money, as Buffett states, it is at best a transfer system. I have called it before a sort of electronic American Express check that fluctuates in value.

The spike in the Bitcoin  price was caused by extreme enthusiasim from two areas, techies, and some libertarians who mistakenly saw Bitcoin as an answer to government oppression, NOTE TO LIBERTARIAN BITCOIN FANBOYS: Any "currency" that has every transaction posted on the internet so that anyone can view it, while government simultaneously requires the taking of identification of anyone who purchases bitcoins, is NOT a libertarian answer to anything.

Nevertheless, the fanboy enthusiasim caused a huge influx of money into Bitcoin, which not that long ago caused  bitcoins to trade for over $1,000. Think about that, there are people that bought bitcoins at over $1,000. That buying is now exhausted and the current price of  $268.62 is a reflection of that. In other words, soon the scammers will even be fleeing the Bitcoin arena.

There are some smart guys doing some interesting things with blockchain technology, but this will also have no impact on Bitcoin as a "currency" climbing in price. Scammers, or no scammers, expanded buying for Bitcoin appears to be exhausted.

 Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics

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