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Get Rich Quick Schemes: Why Do People Fall for These?

It’s scary. The amount of people that continue to fall for the allure of schemes that only end up putting people in financial ruin. These things come in many flavors:

The truly illegal scams: Many of us have seen them before. I think every one has received one of the Nigerian letters indicating that a fortune could be theirs. Or the e-mail stating a long lost relative has left you an inheritance overseas in some offshore tax haven. Just contact them with your bank account number and it is yours. And of course, provide them with this and kiss your bank balance goodbye. The PPH in late November had a great article featuring the person in charge of Maine's office of the U.S. Secret Service, indicating that people still continue to fall for these scams over and over.

But the “get rich quick” schemes don’t necessarily have to be illegal. Some are very legitimate such as:

Legalized gambling: It is one thing when you are hanging out with your buddies and playing poker with the money in your change jar. That’s entertainment. It’s another when you are playing against someone who’s in the business or with money you can’t afford to lose. Take for example lottery tickets; you probably have a better chance of getting hit by lightening before winning Megabucks. But this doesn’t stop people from trying to win. Imagine instead of paying $2 towards Megabucks every week, you invested it moderately, making 8% over thirty years. If inflation was 4%, this decision would be worth $4,000 in today’s dollars (this means NOW). And with casino’s, why go against the house, which always stacks the deck in their favor (and if you figure something out like counting cards, they ban you from playing anyway). I just see no plain reason why someone would enjoy something that systematically is going to beat you.

Seminar Circuit: You’ve heard of these before. A so-called “guru” promises that their method will “Make You Rich.” Usually these “guru’s” write a book that makes it sound way too easy and mysterious online reviews of the book from so-called readers claim life has been rainbows, puppies, and unicorns ever since they’ve followed the guru’s methods. And usually the guru frequents the cable news to support their ongoing national seminars with exciting destination spots such as Florida or Vegas, maybe showing one success story to promote their ways. In the end, the “guru’s” prescription ends up leveraging yourself to the hilt to invest in real estate or creating a business (without addressing the capability that you have the wherewithal to be capable of doing either). It’s a lovely deck of cards that will ultimately fall.

Investing: I’ve seen a lot flavors of this over the years, from buying penny stocks, takeover rumors, watching technical charts and day trading. Recently it has gone into real estate, energy or correlates well with what’s “hot” at the moment. I suspect the same people who panicked and ran out of the stock market last June are back, buying things at much higher prices. Investing by nature is a long-term process where you act upon your lifetime goals by implementing a strategy. Speculation is a short-term process where the investor reacts; entering a perceived opportunity or running away from a threat at a moments notice when the crisis du-jour has arrived. In the end, finding the next Microsoft is a lottery ticket within itself, a matter of luck than skill. What if you do get lucky? Roughly 80% of the people who gain their wealth by investing in one thing usually lose it. And it is because they fail to diversify or their overconfidence blinds them; thinking they have the “magic touch”, they chase for the next “hot” thing that will wipe them out at once or gently erode their wealth in a never ending process of small mistakes over time.

Why do people over time continue to fall for these? It can be summed up in one word: Greed. This is one of the eight great investing mistakes people make and it has always been around and always will be. How can you stop yourself from making a greed based decision? Here are some tips:

-If something is too good to be true, listen to your instincts

-If you feel anxious or excited about the opportunity, you better step back. Good investing isn’t emotional; it’s a disciplined boring process. When emotion gets in the way, you are going to get burned

-Take your time. Good investment decisions never have to be made immediately on the spot. And if you are getting pressure from someone else to decide on the spot, I’d question the motive.

If you find yourself always chasing the next get rich scheme, make yourself a promise for the New Year – don’t get caught up in it. It may not be as exciting, but it will save you a lot of time, money and emotional pain in the long run.

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