What is a fraud?
That is the wrong question. A fraud is a person. It is not a system, or a specific script, or a scheme, or a lie.
Remember the key difference between the “who” and the “what.”
Who your investment strategies are with, and who they invest with in turn, will determine whether you get scammed or not.
Investment strategies are never themselves to blame. It takes a human, a bad actor, to commit fraud. It requires intention.
Have you lost money in your private wealth account this way? Bought a penny stock from one of those “pump and dump” schemes? Did that cause you to drop all stocks and buy only bonds?
Looking for fraud involves three things, traditionally. Horizontal analysis looks for manipulated figures, false numbers. Trends
that don’t make sense. And finally looking for evidence of hiding losses .
But in fraud we should be looking for bad actors!
There is a fundamental difference between fraud and bad value stocks. It is okay to invest in a business that does not do as well as you hoped.
This is the risk we sign up for as investors, and we can diversify (have many investments) to deal with this risk. It is not okay to invest in a
business that was set up to take your money and not return anything regardless of whether there is a real business behind the investment, and regardless of how the business does.
For example, many Chinese companies were not properly vetted by the Chinese government. Even though they reported good earnings, their
stock prices dropped and their accounting was found to be faulty. Not every Chinese company did this however. But in 2015, Chinese stocks collapsed together.
How do keep from losing money when a stock has all the “right numbers” to show a good valuation?
The answer is to look at the people running the company and auditing them. Did they run a company into the ground while claiming good valuations before?
Did their accountants agree to show good numbers before that were not true or verified? It was the auditors and government that failed in China, the value stocks still hold their value and bounced back.
Sometimes, you do want to stay away from a sector with insufficient checks and balances. Such sectors will draw bad actors. But don’t confuse the few bad actors who can ruin a sector for a time… with the good people who are almost always a majority.
In general, if a stock shows good profits, that is good for value investing. The exception is fraud. When we set up your investment solutions, we do value investing while also keeping eyes open for fraud.