When something sounds too good to be true, it usually is! I’m not simply referring to my fib on April Fool’s Day, but I’d like to open a discussion about investors that are drawn to “The Titanic” of investments like moths to a flame.

The Titanic, thought to be the fastest ship afloat of her time and widely regaled as almost unsinkable. Yet, the infamous British liner sank on the night of April 14, 1912, after crashing into an iceberg in the North Atlantic Sea. The Titanic sounded too good to be true on her maiden voyage. But can you imagine the excitement of those passengers as they became the first to board this ship?

The Portus Titanic
Let’s bring this back to the world of investments. What about those first investors of a hedge fund called Portus? With no discernable track record, these investors gleamed with dollar bills in their eyes, smiling at the promise of sweet returns in both up and down markets, happily gave millions to a scheming co-founder who fled to Israel.

Another Titanic Scheme
I recently found another example of a investment scheme gone bad. Hidden in the pages of Canadian Business online lies an investigative report about more tales of deceit, more funneling of raised capital to suspect and unreachable offshore accounts. Robert Hryniak and others play the foils in this long story. Follow it if you can, for some you may enjoy this “investment novel” or short story. For others, you may have a tough time keeping up with all that’s happening.

To summarize the tale, this joint venture was promoted as a “bank debenture trading program” that offered investment-grade fixed-income securities and promised a return of 12% or more a month (not a typo!).

Where Were The Warning Signs?
The warning signs were all there, here are some for you to examine. Would you have fallen for any of these?

1. Supposed investments take the form of debentures, letters of credit, guarantees and similar instruments.
2. Promoters use jargon such as “prime bank notes,” “prime bank debentures” and “roll-over programs.”
3. Promised returns are enormous, as much as 20% a month.
4. Risks are said to be low or entirely absent .
5. Investors are sometimes told that trading cannot begin until a certain amount of money has been pooled together–say, US$10 million.
6. Promoters tell prospective investors they are being permitted access to a secret trading regime, and may ask them to sign non-disclosure agreements.
7. Money is sometimes filtered through offshore accounts in countries with favourable banking secrecy and taxation rules.
8. Investors receive documents containing technical language in an attempt to confuse them.
9. Little information is provided about how returns are generated.
10. Once they’ve invested, participants get little or no return, and lose their principal.

My Point
As much as I’m tempted to jump in on an IPO, invest in a newly created mutual fund, or fall head over heels of a broker’s pitch about the latest “ground-floor opportunity”. I’d rather miss the glory than be the first to board a sinking ship. A solid track record is a must for me to consider an investment.

We always say that past performance is not an indication of future results. That is perfectly true, since there is no guarantee that Titanic would not sink after 1000 successful voyages. But the alternative of navigating in unknown waters is like walking in a dark tunnel towards a dim light at the end. Let’s hope that light doesn’t turn into a train coming towards you!

There is also a point to be driven home about the importance of disclosure. Disclosure is the most essential reason for enforcement regulators to exist. The curious thing about this is any disclosure can be faked, but time cures all ailements as eventually faked results will be exposed. However, absence of disclosure should always ring alarm bells!

It Won’t Happen To Me!
Those were the famous last words thought of by Portus investors as they signed the dotted line. The investors in Portus were ordinary Joes, inspired by the sweet talkings of advisors, broker/dealers who only dreamt about the sweet commission they were getting. Sometimes we are too smart for our own good. Constant vigilance is the key!

Point Counter-Point
The unfortunate thing the Titanic was that it sank the first time, but somebody had to board it first or there would not even exist the possiblity of a second time! Rest assured that there will always be people who are ready to jump the gun. I leave you with one final quote from the master investor, Warren Buffett.

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”