Thursday, May 16, 2013

Book Review: The Vigilant Investor

The Vigilant Investor (2011) by Pat Huddleston

This book deals with various kinds of financial fraud and was written by a former SEC enforcer who currently heads an agency that investigates such matters. Drawing upon his personal experiences as an investigator, the author explains how different investment scams work (e.g., Ponzi schemes, offering frauds, pump-and-dumps, etc.) and provides details about the con artists behind them, giving many enlightening real-world examples. He also discusses how unscrupulous and reckless financial advisors can mismanage the money of vulnerable people (e.g., the elderly and the sick) by churning their accounts and steering them toward bad investments. At the end of each chapter he lists several tips for due diligence that can help people become vigilant investors by recognizing (and avoiding) various scams and fraudsters. Overall, the book provides an informative look into a dark and dangerous area of the financial world.

Even though the author talks a bit about the science of financial decision-making and why people fall prey to investment fraud, a recurring thought in my mind as I read the book was that many of the scams and con artists could have been avoided if the victims had just a basic understanding of investing and used some common sense. For example, the long-term compounded annual return of stocks has typically been around 8-10%, but the return from one year to the next can be quite variable and even negative at times. If an investor knew only that information, then he should be extremely suspicious when someone approaches him with a stock investment scheme that guarantees a market-beating return with no risk of loss. If it sounds too good to be true, then it usually is. Of course, some frauds are more difficult to detect than others, but a modicum of due diligence should raise some red flags. If people educate themselves and approach a potential investment (and the individual touting it) with caution and skepticism, then they should be able to drastically reduce the probability that they will be victims of fraud.

Note: I read this book in May 2013.

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