As the world’s largest economy enters a purple patch in terms of economic growth, corporate profits and financial markets and the rest of the world likely gets a slice of this prosperity, here’s a timely reminder from Ben Carlson about how these are exactly the sort of conditions for financial frauds to prevail. Ben studies the occurrence of fraud in history and shows how the roaring 20’s particularly stands out as a Golden Age of Fraud.
“The Roaring 20s had everything a con-artist looking to dupe people out of their money could ask for — innovation, new financial products, a booming economy, rising markets, new and exciting technologies, loose lending standards, new communication tools and people getting rich all over the place….
…The Roaring 20s was a time of innovation in the financial markets but there were still bucket shops where people went to gamble their money on the markets. A scam artist nicknamed “The Kid” would set up fake bucket shops promising people the ability to buy $5 stock certificates for $1.What was the catch? Of course, those certificates were fake. He ran this same scam in multiple cities all over the country.
There are endless stories like this from that period.
The financial markets feel wonderful right now. It would have been nearly impossible to not make money over the past year or so. The economy could legitimately be setting up for our own version of the roaring 20s.
Yet these good times could also be setting us up for a new golden age of financial fraud.
You have new and exciting innovations happening all around us. A new asset class is being established right before our eyes in cryptocurrencies. Tens of thousands of people have become multi-millionaires in a matter of years.
All of the scam artists, hucksters and charlatans have to be licking their chops right now.”
The interesting thing he highlights is how it is actually the wealthy (natural targets), but also successful and educated that fall prey to these scamsters.
“One of the studies I reference in my book discovered people who were caught up in financial scams were actually more knowledgeable about markets and investing than people who weren’t involved in scams. This makes sense when you realize the people with the most money have the biggest target on their back.
But it’s also true that the more successful you become when it comes to your career or your finances, the more overconfident you become in your own abilities as an investor. And wealthy people love to assume the best returns and investment products are only available to them so they let their guard down when it comes to due diligence.
…Investors spend a lot of time worrying about macro and market risks. Now is also a good time to worry about being taken advantage of by scammers and promoters promising ultra-high returns and easy money.”
Detecting accounting fraud by companies remains a cornerstone of Marcellus’ stock selection approach.
 

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.

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