The Vigilant Investor by Pat Huddleston

Author:Pat Huddleston [Huddleston, Pat]
Language: eng
Format: epub
Publisher: AMACOM Books
Published: 2012-04-16T14:00:00+00:00

The Test-Drive

David Copperfield has walked through the Great Wall of China and made the Statue of Liberty disappear, and Chris Angel has taken Harry Houdini’s water torture trick up a notch, locking himself upside down in a water-filled glass coffin suspended several stories above the ground. Two minutes after Angel enters the water-filled coffin, it crashes to the pavement. If he doesn’t perform the trick successfully, Angel will either drown or hit the asphalt like a bug on a windshield.

Copperfield and Angel would agree that they are masters of illusion, not magic. But to those who do not know the trick, their acts might as well be magic. We are at such a loss to explain what we have seen that magic almost becomes an acceptable explanation. Anyone who encounters an investment scamster is likely to encounter an equally powerful illusion.

The scam artist’s grand finale is called the test-drive. It is the illusion that leads most investors in a Ponzi scheme to truly believe that they have invested in a legitimate profit-making venture. They believe it like they believe that the sun will rise tomorrow or that Barry Bonds knowingly took steroids. And, yet, as with any other “magic trick,” there is an ordinary explanation for the test-drive illusion that seems obvious once you know it.

We start with the common assumptions of the audience (investors, in this case). No one trusts anyone else more than she trusts herself. In the matters that are most important to them, people insist on seeing things for themselves, on being able to say that they saw something or heard something personally. We start, therefore, with the realization that people tend to believe what they see and hear for themselves.

“You mean I can earn 2 percent per month, guaranteed?” you say. “I don’t believe it.”

“It’s true,” your adviser says. “I have 10 customers who are earning that return right now.”

“How can that possibly be?” you ask.

“The trader who runs the program has access to medium-term notes that he trades on a platform that is usually reserved for the top 10 financial institutions in the world. He gets the notes at a discount and already has buyers lined up at face value.”

“That doesn’t make economic sense,” you say. “I’ve been to college, taken finance and economics, and that is simply not possible.”

“It’s okay if you want to pass, but I might be able to find a way for you to see for yourself.”

“That’s the only possible way I’d ever believe this,” you respond.

“Well,” says your adviser, “there are plenty of people clamoring to get into this thing, but you and I have known each other a long time, and I don’t want you to lose this opportunity. So, I’ll tell you what. The minimum investment is $250,000. If I can find someone who’s willing to put in just $240,000, I could ask the trader if he’d let you in for $10,000. I could pool your $10,000 with the $240,000 and meet the minimum investment that way between the two of you.

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