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Scamsters scamming themselves

The allure of quick gains in stocks is such that scamsters often fool not only their victims but also themselves

Ambar Dalal Fraud: Investor alert on Mumbai CA scamAnand Kumar

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dhanak हिंदी में भी पढ़ें read-in-hindi

"Mumbai CA Ambar Dalal flees with crores of investors' money," said the typical headline. There was more detail on social media, where the victims started a group to coordinate their actions. The social media action in such cases may have been a new phenomenon, but the story is a very old one. An 'investment consultant' started managing people's money. For a while, he generated great returns in booming markets and paid back his clients, but when stock prices paused a bit, he stopped paying. Sometimes, they disappear, and sometimes, they confess. Some are caught, and some are not. However, the basic story is pretty similar. Mr Dalal is hardly the scale of Bernie Madoff - most reports say he managed around Rs 50 crore, although some quote figures like Rs 500 or 1,000 crore.

However, this is the season for stock-related scams—or rather, it's the season for stock-related scams to fail and, therefore, come to light. All kinds of Ponzi schemes and other scams can be kept going when the markets are booming. When stock prices start hiccuping, the scamsters fail to keep the illusion going.

There are always variations. Some of these scamsters start OK and climb onto a tiger's back from which they cannot get off. Maybe so is Ambar Dalal. At the other end of the scale, the Raju brothers of Satyam were such a case. Some were made of a different mettle. For example, Shivraj Puri was first arrested in 2011 when he scammed bank customers in Gurugram of about Rs 400 crore while working as a Citibank relationship manager. He was arrested, skipped bail and then was re-arrested six years later, running another scam. I believe he died in prison some years ago.

The lesson for investors is clear: if something seems too good to be true, it probably is. In a bull market, it's easy to get carried away by the promise of high returns and ignore the red flags. The funny thing is that some scammers also need to learn the same lesson. Puri was said to have been caught because he used all that money to trade derivatives, which he lost. In another way, Raju was the same. Perhaps so is Ambar Dalal. Basically, unlike normal criminals, these people scammed themselves, too, with the same stories. That's how powerful the allure of making quick money on the stock markets is.

Therefore, I say that investors, scamsters and potential scamsters must all remember that there are no shortcuts to wealth creation. Consistent, disciplined investing in quality assets over the long term is the only reliable path to financial security. Chasing quick returns and entrusting your hard-earned money to unregulated entities is a recipe for disaster.

Despite the long history of investment scams, the fundamental nature of the problem persists. Even individuals who regard themselves as well-informed and astute investors fall prey to the allure of seemingly profitable investment opportunities. The standard explanation points to a deficiency in financial literacy—a lack of understanding about what strategies are effective and which ones are not. However, the truth could lie in the opposite direction. Rather than focusing solely on learning what to do, it might be more beneficial for individuals to understand what not to do with their financial resources.

The idea of focusing on what not to do is powerful. This is where the concept of 'via negativa' comes into play. It's a philosophical principle that suggests that we can often achieve better outcomes by focusing on what to remove or avoid rather than what to add or pursue. In investing, this means learning to identify and avoid common traps and mistakes.

The belief that you can consistently beat the market leads to overconfidence, excessive trading, and a disregard for the power of diversification and long-term holding. By learning to avoid this trap and instead embrace humility and patience, investors can significantly improve their odds of success.

Also read: Not just the day's numbers


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