Book Excerpt: Five Easy Ways To Get Suckered On Your ‘Investments’
Five common ways in which people regularly get conned, when they buy certain financial products. By Deepak Shenoy.
Excerpted from ‘Money Wise: Timeless Lessons on Building Wealth’, by Deepak Shenoy, with permission from Juggernaut Books.
It used to be fashionable for men to show their scars, to show they’d suffered more than the other guy. In the same spirit, let’s discuss how one gets suckered into buying various things. Here are five common ways in which people regularly get conned.
Asking Your Banker Where To Invest
This is like asking a barber if you need a haircut. In fact, if you asked your banker if you needed a haircut he would likely say yes, and then try to work out a deal where he recommends a barber who pays him 6% commission.
Legends say that once upon a time bankers were staid, honest, hard-working people who would know who you were, remember your birthday, and advise you not to buy that car because you couldn’t afford it. That breed either never existed, or it has retired, or maybe been kicked upstairs into management.
The banker you’ll meet is a ‘customer-facing relationship manager’ who sees you as a target parked at a centre of a pattern of alternating black and white concentric circles. In fact, they even call you a ‘target’ when they’re talking shop among themselves.
One of the best ways to get conned is to ask for a ‘safe’ investment avenue with ‘maximum returns’. This is the point in a movie when the subtitle flashes ‘Sucker’ in italics. With a broad smile, the relationship manager will immediately whip out a product where, after complex calculations, you get 25% of your investment.
You might feel happy until you read that sentence again, and you find that all you will get is 25% of your investment. That is, 75% will disappear.
Nowadays, commissions are so complexly intertwined in financial products that, after initial outrage, you admire the guys who thought up these structures and these campaigns. They use advertisements which show your children becoming the rock stars you always wanted to be. This is just to make you believe an insurance product (of all things) will make your children rock stars.
The only problem is that by the time the kids are ready to become rock stars, the cost of the guitar has far surpassed whatever crumbs are left to you after all the commissions have been paid. And to top it, your kids probably listen to absolutely horrendous music.
Versions of this story can be served up as sides when you’re sitting around with friends and downing gallons of beer. That’s one thing these scams are good for. The beer consumption at least will help to grow GDP.
Going With The ‘Heard’ Mentality
I have this friend who seems to have made a lot of money investing in stocks. He keeps telling me the names of stocks that he bought and how he made a ton of money. Like he bought Satyam at Rs 20 in 2008 (it has now merged with Tech Mahindra and as of 2021 given the equivalent of a 12x return from the Rs 20). And he also bought Infosys at Rs 100 in 1994 (Infosys is trading at Rs 1,325 after multiple stock splits and bonuses and a Rs 100 investment in 1994 is now Rs 2,25,000 in market value). And he bought Unitech at . . . okay, he never even bought Unitech. (Furiously erases lines from demat statement, because Unitech trades in 2021 at Rs 2.60 and it was once Rs 500.)
Well, it seems everything he bought turned to gold, so I should listen to him. He subscribes to a tip service that only charges if you make profits. And these tips tell you to buy 50 stocks every day. Some of this laundry list will definitely make a profit, so they can bill him for as long as they want.
Some of the ideas are seductive but crazy. In 2011 a company named Atlas Copco delisted (the shares were bought back by the promoters who then pulled the company off the stock exchange) at a price much higher than expected, netting 50% profit for lucky shareholders within a month.
My friend’s tipsters have now compiled a list of all such companies that have a microscopic chance of getting delisted, and they’re telling everyone to buy these. That plan goes something like this. I’ll buy first. Then, other investors will buy and the price will go up and these stocks will be delisted at even higher prices. Never mind that many of these promoters won’t buy back at the current price, leave alone paying a premium if the stock price rises.
People who listen to tipsters often say, ‘Tell me, if I don’t listen to other people, how will I know where to invest?’ Well, let’s say my friend told me the best-ever car was the Maruti Versa. And Amitabh Bachchan advertised it, so it must be the best car around ... Would you buy this car without a test drive, or even if you read on the internet that they were going to discontinue manufacture?
Listen to people by all means, but don’t suspend your judgement or blindly take advice.
The Great Initial Public Offer
The heard mentality also goes nuts about IPOs. Every new company going public is a multi-bagger if you listen to the khabar.
‘The latest IPO is linked to the <insert name of famous political family> and it will only go up. Look at the demand! Look at the Coal India IPO – it went up 30%!’
But they don’t tell you to look at the NHPC IPO which had gone down 33% even when the market was up in the interim. They conveniently ignore all the random IPOs that have failed.
IPOs are big money-spinners for the people selling them regardless of the returns the investors get. Oversubscription makes every lead manager happy and it sends the TV channels into a frenzy. So IPOs are sold by any and every means possible.
The most infamous precursor to the Great Indian Crash was the Reliance Power IPO of 2008. The brokers used the Ambani surname like toothpaste and convinced trainloads of investors to borrow money to subscribe to India’s largest IPO (at the time) at a whopping Rs 450 per share. The stock price dropped 50% a few days after it listed.
Thirteen years later, after a consolatory bonus issue to irate investors, and a merger with RNRL, the stock price is at Rs 10, in 2021.
IPOs sell well because we like the idea of something new. Remember in our earlier chapter on stocks, we didn’t add a section on how to buy IPOs? That wasn’t by accident. It needs considerably deeper skills to interpret and analyse IPOs, since the company has little history to go by. The bankers who say it’s great also earn a commission from selling the shares, so they’re biased.
But IPOs are hyped up, and oversubscribed many times over, so much that there is a random lottery conducted to allocate shares. An old hand said this best: If you want an IPO, you’re not going to get any shares allocated. If you get any shares allocated, you probably don’t want any!
And if you really want to get conned, a great way is to borrow money to buy into the next great IPO. You might make money, or not. Either way, you’ll have a tale to tell.
Forgetting The Invisible
I can buy a twenty-five-year time share holiday package – one week a year, at any one of forty-odd resorts, by paying a few lakh today and a few thousands every year for maintenance. What I don’t see is that I get tied to their properties. If all my favourite places are booked for the Dussehra holidays, as they will be because everyone and their nephew have holidays, I’m out of luck.
I now have to choose between spending more money on a holiday I really want, or go to a place I don’t want to be, just to ‘recover’ my investment (Himalayas in December!).
In a similar spirit, I’ll buy a sugar stock on the news that sugar prices have gone up. But I’ll forget that in the past, for centuries, the industry has gone through cycles and that higher prices means more sugar will be produced and there’ll be oversupply next year. Then the prices will crash.
You’ll fall for this sort of scam if you forget the invisible, the unknown, and the past. After all, the ignorant are ignorant of their ignorance. And the education, although expensive, makes for a great story.
I have just won an award of $1 million from Microsoft.
(That is how the mail goes.) To get that million, all I have to do is give my name, address, PAN, Aadhaar, passport copy, copy of bank account, and a small ‘fee’ for the actual transfer which is stuck in the customs department in Uganda. And then, a little more as a bribe to that Uganda official who needs to sign on the form. Oh, so they need a little more to clear up all pending issues, and perhaps if I could come down to, say, Nigeria, I might be able to meet with the local representative of Microsoft to clear up the matter.
Even if you discount the travel part of it, it’s incredible how many people fall for this kind of con job. And because it’s so famous, and they can’t admit they were conned, it’s all under wraps.
The Insurance Trap
‘I’ll give you this new plan, sir. You pay one lakh rupees a year for ten years.’
You wonder where this is going, but he’s calling you ‘sir’, so he might have something.
‘Then we pay you back eighty-four thousand rupees a year for another ten years.’
Mentally, you’re thinking: Okay I’ve just got about Rs 16,000 a year invested, so I should now have about 1,60,000 still invested in there.
‘After that, we will give you a lump sum amount of ten lakh rupees.’
In your head, you can hear the ‘eureka’ happen: 1.7 lakh invested. I get back Rs 10 lakh. That’s awesome, you think. ‘Where should I sign?’ you ask.
‘Oh, we also give you insurance of twenty-five lakh rupees so that if you die your wife gets the amount you paid, plus twenty-five lakh rupees back, sir!’ says the agent, emphasizing the ‘sir’ even more. You’re almost convinced, and you call your wife.
‘Ritu, this is like super awesome!’ and you repeat the information on the phone.
‘Ajit, have you done the calculations?’ says Ritu, and you sense a little bit of cynicism in her voice. The agent is trying to fill in your PAN number, so you murmur it to him and tell her confidently, ‘Look, after the first ten years they start giving us back the money so technically at the end of twenty years, we only have 1.6 lakh rupees invested, and they’ll give us ten lakh rupees. That’s like at least 15% or something.’
‘But wait, what if I put this in a spreadsheet and calculate what it really means . . .’
‘Ritu, I know this stuff, it’s foolproof,’ you say, smugly waiting because the calculations should prove you right.
‘It’s 4.8% a year,’ says Ritu, and the voice almost hopes she’s wrong.
‘What, no chance!’ you say. She sends you the spreadsheet by mail. It’s correct. It’s just 4.8%. Less than 5% a year, when a fixed deposit will give you a good 7%.
You do the calculations yet again.
Rs 1 lakh a year for ten years.
At 7% a year, that will grow to Rs 14.8 lakh.
Grow that for another ten years, at 7%, but take out Rs 84,000 every year.
You’re left with Rs 16.7 lakh.
And you were actually excited about it all. You’re now angry and you show the agent the calculation.
‘Sir, but we also give you the insurance!’ the agent says, angrily. It’s the best-selling product of the month, and this stupid customer is showing him a spreadsheet?
You look it up, and a simple regular insurance for Rs 25 lakh at the same insurer costs Rs 6,000 a year. Take the same insurance separately, and the spreadsheet shows the new number: At the end of twenty years, you have Rs 14 lakh left. By just using a fixed deposit and a separate insurance plan, you make 40% more!
The agent is not going to defend this. ‘Why would I give you a bad product, sir? More than thirty people have signed up,’ he says frustrated. He makes a mental note never to contact you again. Spreadsheet-walas. They destroy GDP.
You make a mental note to buy a bottle of wine, because Ritu’s going to rub it in that you have an MBA, and all she did was take an online course on XIRR.
This sounds like a lot of numbers. But it’s simply a product that tells you this: Give me money for ten years. I will give you less than the returns of a fixed deposit.
This sounds extreme. Immediately the family LIC (Life Insurance Corporation) person will jump up and say: But you also get insurance! It’s tax-free! This Deepak Shenoy knows nothing.
But the key factor here is that Deepak Shenoy knows that he knows nothing.
In this matter, though, let’s cut through the BS. There are simpler, very tax efficient products, which will give you at least 40% better returns. But you won’t be told about them. Effectively, you’re suckered.
Why do you get such lousy returns? It’s because of one thing: Commissions. A typical insurance plan pays between 2% and 50% as commissions, and in some extreme cases they will even pay 100% commission!
Deepak Shenoy is CEO and Founder at Capitalmind.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.