This time last week, the national newspapers have been talking about Madam Leong Lai Yee ,who seem to have ran away with many of her investors money. 60 investors have came forward saying she owed them $60 million. Madam Leong and her husband were believed to be former property agents, who attracted more than 100 investors to very attractive investments. The idea is to purchase distressed properties in Orchard, Tanglin and Newton, which were on the verge of being repossessed by banks and sell them to buyers from China at a profit. They were promised returns ranging from 10-48% over a 4-8 month period. The investors would have to pay a 40% downpayment, which would be forfeited if the buyers pulled out. Madam Leong urged the investors to use their CPF or take out a second mortgage to finance the purchases.
I doubt such scams is new as on and off you hear case study like that.
The initial reaction of many is “how can these folks be so gullible to believe this kind of return is possible!” Or “common sense is not really that common after all!”
While I think a large part of the reason is that that majority of the folks are not financially literate, thus they cannot competently evaluate returns versus risk.
I am not so quick to push the blame entirely on the investors. I believe sales skills, whether scam or not have gotten sophisticated as well.
In this case study, many of the investors do not just have fleeting contact with the lady that fled away as she frequently meet up with them in leisure circle.
Many of the relationship here is rather deeply rooted with Madam Leong.
I would think that in my position I may believe in much things presented especially when the properties are not obscure overseas ventures but Singapore one.
Perhaps the giveaway for me was the guarantees as I find it quite impossible for the seller to undertake that level of liability should things not go their way.
Risk = Permanent Loss of Capital
These scams are what I would classified as Risk, a permanent loss of capital.
If you purchase a unit trust, exchange traded funds or stocks, their market price goes up and down. Your individual stocks, property price go up and down. Sometimes much lower than your purchase cost price.
This to me is not really risk but volatility. It just tells us that these assets price don’t stay stagnant for most of the time.
Assets fluctuate in prices, regardless of whether there is an exchange for it. Property prices fluctuate. Just because you do not see the prices doesn’t mean its not being volatile. You may call this short term risk if you want to push it.
Volatile assets, where fundamentally sound, will recover over time and appreciate over time. So that is why I do not consider volatile things to be risky.
Now scams is irrecoverable most of the time. In certain stocks, like the GTAT example, you can have irrecoverable losses as well (read my short case study on GTAT).
And you should prevent that. The way to do it is through Risk Assessment. This to me is an important module in Wealth Building.
Building up your Risk Assessment Competency
In all modules there is a meter or many chapters to a certain craft.
If you refuse to start you have zero competence.
If you based on simple stuff, you may reach chapter 1. That is likely not going to prevent some sophisticated scams or bad investments. You may need to be very much above average.
For many folks, they failed to realize risk assessment is an important wealth building module by itself. Or that they think they are very competent in risk assessment when in reality they are 15% .Because of that they have a resistance to learn it and you would get situations like this.
Learning these are lifelong.
If you are serious about building wealth, understand that u need some competency in general risk assessment and your wealth building method, be it individual stocks, trading, property or passive index investing. Failure will result in capital loss.