Novice Investing - Beware Of Get Rich Quick Scam

Date: Thursday 20th 2008f November 2008 04:56:28 PM

Beware Of Get Rich Quick Scam - 12/6/2005

By: Hari Wibowo

Everyone wants to be rich. Hey, abundance is good. When you live abundantly, you will be satisfied, some say. That is why a lot of people tout the next get-rich-quick scheme. And that is why this business thrives. If everyone lives in abundance, who would want to attend a $ 500 seminar promising you to be rich within months?

What constitutes a get rich quick scam? For this, you need to use your common sense. If someone can promise you a return on investment of 20% monthly, is this scam? That depends. There are some decent way of earning that kind of return occasionally both in the stock market and in the real estate. Recent examples of stock investing include investing in companies called Seagate Technology (STX) or buying Korean based Webzen Inc. (WZEN). That includes both pure luck and skill. Without the two, it is less likely that you will achieve that kind of a return.

So now, if someone promise you that they can achieve that kind of a return for the next fifteen years, is that scam? Whip out your calculator and you find that one dollar compounded monthly with 20 % return on investment, will wound up to be $ 179 trillion after fifteen years. This is seven times the entire world's Gross Domestic Product (GDP). Simply said, you will own the assets of everyone in this entire world and then some.

One of the best investors in the world is currently Warren E. Buffett. Even then, he only achieves compounded annual return of 25 % a year. And yet, he is the second richest person behind Bill Gates! I think this is the best gauge to measure investment scam.

How about leverage? Leverage can increase your investment return. Yes, it can. It also increases your risk. In the short run, you can get more than 50 % monthly return even without leverage. It happens a lot. Count yourself blessed. But, if you expect to make that much money for the next fifteen years, you are kidding yourself. The law of number will be against your odd after a while.

What is the best defense against investment scams ? Education is foremost important. Furthermore, consulting with your friends and relatives will be the next best thing to do. The need for money is there and hence investment scam business can still thrive. The next time you heard some wonderful business opportunity, you should ask yourself if there is indeed a free lunch in this world.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Seagate Technology (STX) or any other securities.

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