Recently there have been many perceived scams coming to light in the local press. The latest one to garner publicity would be that of Suisse international. You can find the Channelnewsasia news article here. The gist of the story is that the investors placed monies with the companies in return for monthly cash payouts.
Let’s take a look at how the word investment is defined. Dictionary.com defines investment as “the investing of money or capital in order to gain profitable returns, as interest income, or appreciation in value”. This is a simplistic and idealistic definition of the word. The mere fact that risk was never included as an aspect of investment fails to address the true definition of investment. To get a better return, one would have to give up a certain amount of security. Risk and reward are positively correlated.
Let’s now analyse the difference between a failed investment and a scam. If one were to purchase a property at the peak of the cycle and then sell it when the cycle turns, the fact that he loses money is because of a failed investment. The underlying asset was present and there was a definite plan to undertake a certain level of risk and to give up present value of money for a higher potential return. A scam is where there is no underlying asset and the investors were tricked into thinking that they were investing in something that actually existed.
What then should we focus on while making an investment?
1) An increase in projected returns would inevitably result in an increase in risk. If a product is projected to give in excess of what we would expect in Singapore, the risk would most probably be much higher. The safest form of investment would be to place the monies in a secure bank. This is why banks in Switzerland are offering negative interest rates. Swiss banks and the Swiss franc are seen as safe havens and people looking for a flight to safety are willing to pay the banks a fee to place their monies with them.
2) Every investment needs to have a time frame. Many investors are told that a certain investment should make a certain amount of profit in time. The thing is that the time is not determined. Investing in a third world country would yield potential great returns. No one can deny that the asset values in third world countries will appreciate in multiples. The thing is that the time taken to develop these countries may be a very long time. Many investors are placing monies in assets in places like Cambodia and Myanmar. The investors are under the guise that such investments are a sound bet. They perceive that these countries will develop at a rapid pace. It would be wise to remember that infrastructure needs to be developed before major foreign companies start to flock in. The fact that a few multi-national companies have set up shop in a developing country should not be a taken as a sign that the country is a safe bet. Huge companies have the resources to cast their net out wide to achieve potentially supernatural returns.
3) The monies that are to be used for investment should be spare monies. Investors should not think that investments are a sure fire way to make money. Many investors make investments which yield poorer potential returns than what they are paying on their debt. For example, if someone is paying 10% on his renovation loan, he should use his spare monies to pay off this debt before he invests in a property in a 3rd world country which promises 6% returns annually. The fact that the debt that he is servicing is on something that can never potentially appreciate in time would mean that he should get rid of it before incurring any other form of investment.
All these points should be considered before investing. Remember, an investment can potentially turn sour as much as it can bear fruit. The latter is often highlighted much more than the former.
Yours Sincerely,
Daryl Lum
