Can't-Miss Investments That Wipe You Out

Is R. Allen Stanford a real-life Tony Soprano?

The failed financier, in jail and accused of bilking investors out of billions in a Ponzi scheme, may have led a "blood oath" ceremony meant to secure the loyalty of Antigua's top financial regulator, Leroy King. That's according to James Davis, Stanford's former finance chief, whose plea-agreement confession was released to the public this week.

Imagination doesn't kill profits; people do
Davis is cooperating with federal authorities as part of a plea deal and has already confessed to committing mail fraud; conspiring to commit mail, wire, and securities fraud; and conspiring to obstruct a Securities and Exchange Commission investigation. He faces up to 30 years in prison, The Associated Press reports.

Davis's story is a fascinating and chilling tale of greed and manufactured profits, and strikingly similar to some of the actions of convicted felon Bernard Madoff.

For instance, Davis says that Stanford promised investors that his overseas certificates of deposit -- located in, you guessed it, Antigua -- would pay a much higher rate of return than their U.S. counterparts. To make good on those promises, Davis alleges, Stanford insisted that executives cook the books to show a profit every year.

But the longer the scheme went on, the grander the fiscal stunts became, Davis alleges. For example, in mid-2008, Davis says that he, Stanford, and others agreed to inflate the value of a $65 million real estate deal to $3.2 billion.

Wave wand -- or in this case, pen -- and (poof!), you're $3 billion richer on paper. Scared yet?

Never, ever trust a guarantee
You should be. The truth is that no investment vehicle ever produces a 100% guaranteed return. Risk is always a factor. Don't believe me? Rewind with me to September 2008. For decades, we'd been told that money market funds were like cash -- a riskless investment that we still call a "cash equivalent" on balance sheets.

But not last September. Then, a systemwide financial collapse that ended Lehman Brothers and forced the first of several bailouts of AIG (NYSE: AIG  ) also torpedoed one of the country's largest money-market funds, reducing its net asset value to $0.97 on the dollar. A seemingly riskless investment was suddenly very risky, and Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and dozens of other banks were left scrambling.

That's not all; 2008 was also the worst year for dividends since 1955. Before last year, many investors thought of their dividend income as pretty much a sure thing. Yet nearly 300 of the roughly 7,000 divided-paying public companies tracked by Standard & Poor's either reduced or suspended payments in last year's fourth quarter alone. Just look at these notable companies to see how much some dividends were cut:

Stock

Change in Total Dividends Paid
in 2008 vs. 2007

Current Dividend Yield

Citigroup (NYSE: C  )

(48%)

0.8%

Freeport-McMoRan Copper & Gold (NYSE: FCX  )

45%*

None

Honda Motor (NYSE: HMC  )

(34%)

0.9%

LCA-Vision (Nasdaq: LCAV  )

(67%)

None

Source: Yahoo! Finance. *Freeport-McMoRan announced dividend cut in 2008, but it didn't take effect until 2009.

The message? You don't have to buy from the next Bernie Madoff to lose your shirt on a (ahem) guaranteed returner.

Ensure risks are compensated
Can't-miss investments are like unicorns. They're legendary, ephemeral, basked in a light glow, and an utter fantasy. So don't chase them. Seek instead to ensure that your expected returns for investing exceed the known risks.

And that goes for every investment, whether you're buying options or money market funds. Try to understand what your required rate of return should be. As Bill Mann puts it in this well-constructed piece from 2004:

What we've seen throughout 2004, particularly at the end, was a repeat of 1999 -- a great many investors have seen their portfolios go up simply by making incredibly risky decisions. They forget, if they ever knew it in the first place, that risk factors don't matter until they matter, and then that's all that matters. [Emphasis added.]

Precisely. Don't believe anyone who pitches you guaranteed returns. Know the risk factors, assess the potential returns, and then decide. That's Foolish Investing 101.

Get your clicks with related Foolishness:

Fool contributor Tim Beyers is a member of the market-beating Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is always working for you, even on nights and weekends.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2009, at 5:14 PM, texastar1 wrote:

    Amen...now is the time to short both C and BAC.

  • Report this Comment On August 29, 2009, at 7:33 AM, iviewit wrote:

    WOW – Somebody finally took my advice below and sued Proskauer in a Global Class Action Suit re Stanford!!! That makes two with the first suit filed by Stanford’s CIO Pendergest Holt. They will have to stand in line behind the Iviewit TRILLION dollar suit. What goes around and Proskauer is suffering from the attempt to convert patents for inventions deemed the HOLY GRAIL.

    —-

    MADOFF + STANFORD + DREIER + SATYAM + FISERV + ALBERT HU + The 1031 Tax Group LLC – Edward H. Okun = PROSKAUER ROSE & FOLEY & LARDNER

    Foley & Lardner partner Patricia J. (Trish) Lane represented FISERV, sue Foley, read on.

    Investors who have been burned in these scams should start to seek redress from the lawyers who were involved with these scams. I personally have been trying to notify regulators and authorities of a ONE TRILLION DOLLAR scam that is putting states like New York and Florida at huge risk, as well as, companies like Intel, Lockheed, SGI and IBM. The states and companies involved in the fraud fail to acknowledge the risk exposing shareholders and citizens to impending liabilities. Investigators, courts and federal agents ignoring the crimes and evidence, including a car-bombing attempt on my life. I know how Harry Markopolos felt trying to expose Madoff in a world without regulation.

    Did I hear Proskauer Rose is involved in Madoff (involved many clients too) and acted as Allen Stanford’s attorney. Investors who lost money in these scams should start looking at the law firm Proskauer’s assets for recovery. First, Proskauer partner Gregg Mashberg claims Madoff is a financial 9/11 for their clients, if they directed you to Madoff sue them. Then, Proskauer partner Thomas Sjoblom former enforcement dude for SEC and Allen Stanford attorney, declares PARTY IS OVER to Stanford employees and advises them to PRAY, this two days before SEC hearings. Then at hearings, he lies with Holt to SEC saying she only prepared with him but fails to mention Miami meeting at airport hanger. Then Sjoblom resigns after SEC begins investigation and sends note to SEC disaffirming all statements made by him and Proskauer, his butt on fire. If you were burned in Stanford sue Proskauer.

    Proskauer Rose and Foley & Lardner are also in a TRILLION dollar FEDERAL LAWSUIT legally related to a WHISTLEBLOWER CASE also in FEDERAL COURT. Marc S. Dreier, brought in through Raymond A. Joao of Meltzer Lippe after putting 90+ patents of mine in his own name, is also a defendant in the Federal Case.

    The Trillion Dollar suit according to Judge Shira Scheindlin is one of PATENT THEFT, MURDER & A CAR BOMBING. For graphics on the car bombing visit [I-View-It] (http://www.iviewit.tv).

    The Federal Court cases

    United States Court of Appeals for the Second Circuit Docket 08-4873-cv – Bernstein, et al. v Appellate Division First Department Disciplinary Committee, et al. – TRILLION DOLLAR LAWSUIT

    Cases @ US District Court – Southern District NY

    (07cv09599) Anderson v The State of New York, et al. – WHISTLEBLOWER LAWSUIT

    (07cv11196) Bernstein, et al. v Appellate Division First Department Disciplinary Committee, et al.

    (07cv11612) Esposito v The State of New York, et al.,

    (08cv00526) Capogrosso v New York State Commission on Judicial Conduct, et al.,

    (08cv02391) McKeown v The State of New York, et al.,

    (08cv02852) Galison v The State of New York, et al.,

    (08cv03305) Carvel v The State of New York, et al., and,

    (08cv4053) Gizella Weisshaus v The State of New York, et al.

    (08cv4438) Suzanne McCormick v The State of New York, et al.

    ( ) John L. Petrec-Tolino v. The State of New York

    More @ [Expose Corrupt Courts] http://exposecorruptcourts.blogspot.com

    Eliot I. Bernstein

    Inventor

    Iviewit Holdings, Inc. – DL

    Iviewit Holdings, Inc. – DL

    Iviewit Holdings, Inc. – FL

    Iviewit Technologies, Inc. – DL

    Uview.com, Inc. – DL

    Iviewit.com, Inc. – FL

    Iviewit.com, Inc. – DL

    I.C., Inc. – FL

    Iviewit.com LLC – DL

    Iviewit LLC – DL

    Iviewit Corporation – FL

    Iviewit, Inc. – FL

    Iviewit, Inc. – DL

    Iviewit Corporation

    2753 N.W. 34th St.

    Boca Raton, Florida 33434-3459

    (561) 245.8588 (o)

    (561) 886.7628 (c)

    (561) 245-8644 (f)

    iviewit@iviewit.tv

    www.iviewit.tv

    http://iviewit.tv/wordpress/

    http://iviewit.tv/wordpresseliot/

  • Report this Comment On August 30, 2009, at 11:32 PM, Johnnicash wrote:

    I like cheese

Add your comment.

DocumentId: 973787, ~/Articles/ArticleHandler.aspx, 7/22/2014 4:04:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement