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Scams and shams: good grief, Australia, how dumb can we be?

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Well, here we go again. At a rough guess this must be getting close to a 1000 articles or TV or radio stories I have written about scams over the past 35 years.

Part of me does wonder if I am wasting my time but I am a genuine optimist. While I would be really surprised if a regular Money magazine reader fell for a money scam, I am hopeful that you will share scam stories like this with your kids, grandkids, extended family and friends.

I don’t want to let myself become too despondent about people being scammed. In fact, I think as a “herd” our community is getting better.

An example of this is that I see no evidence that we are still falling for emails telling us that “I am Prince Whoever, son of the disposed King Whoever, and I wish to send you a vast fortune. Just send your account details and I’ll send the fortune to you and we will split it.”

Embarrassingly, in terms of our basic common sense, the emails were pretty much exactly these words and, yes, many fell for the scam.

But the world moves on, and as our knowledge of scams grows, the sophistication of scammers has moved even more quickly. I have to pay grudging respect to some of the very impressive fake websites built by scammers. But now we return to the past.

I have absolutely no idea how some 2000 people have managed to lose $10 million between them to the oldest trick in the book, a play on gullibility and greed. The good news is that won’t take me long to explain the scam.

Four people have been arrested: “four men in their 30s and 40s and a 41-year-old woman”. Sadly for the Gold Coast, as is all too common, four were operating from there and one from Brisbane.

The scam was simply ringing people and offering them an “automated share trading system” that would make you 16% to 18% a month and a “guarantee” that if you did not make $30,000 a year you would get your money back.

Naturally the system did not make 16% to 18% a month and surprise, surprise, the “guarantee” was backed by a $2 shelf company which was folded.

Good grief. How dumb can we be?

Personally, I would love 16% to 18% a month with a guarantee. But I also quite like the idea that the moon is made of green cheese. I am sure that all readers of this magazine would have a bit of a laugh at this preposterous proposal and hang up.

But 2000 people did not. Surely they realised that the return being offered was about 200% a year.

Let’s say we started with $10,000. At 200% a year, this becomes $40,000 after one year. After year five the $10,000 is worth about $20 million. By year 10 it is about $5 billion. In year 20 your $10,000 would be worth enough to buy pretty much everything on planet earth, and by year 30 I guess the universe. Not bad in a few decades.

Mind you, this is a great example of compound interest, even if I have only applied it on an annual basis. If I had done the compounding monthly, the numbers would be higher.

Where you can help is to pass on the basics whenever you get the opportunity. As I see it these are:
1. The risk-free rate of return is close enough to a 90-day term deposit rate, say 2.5%.
2. A return above this is possible if we take more risk.
3. When we take risk sensibly, in the long run we should earn higher returns – but we may lose money.
4. Ask people to think for a moment. If a scammer offers a huge rate of return with no risk, why do they need to sell it to us?

As I don’t actually believe the moon is made of green cheese, I also know super high returns do not exist. If they did in a few decades I would own the planet. Clearly this is absurd.

The simple statement we need to sit firmly in the psyche of our community is pretty simple: if it looks too good to be true it will be.

Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Ask Paul your money question.

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