Rich Dad Paper Assets Team
December 19, 2024
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The key to successful investing: spot a scam before you're scammed
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Logic and due diligence should guide your investment decisions
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The more you know, the harder it is for someone to take advantage of you
When beginning your financial education journey, you may come to realize that the resources out there aren’t always altruistic. But spotting red flags in financial deals isn’t just a skill; it’s a necessity in a world where bad actors are always looking for their next victim. Over the years, Rich Dad advisor and investment expert, Andy Tanner, has learned a thing or two about avoiding these traps, sometimes the hard way. Below, he shares ten key insights to help you steer clear of bad deals and make smarter financial decisions.
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Context matters
The first thing new investors should consider is context. Ask yourself: “Where is the opportunity being presented? And howis the opportunity being presented?” If someone is pitching you an investment idea in an unusual or informal setting—like a bathroom or through unsolicited emails—it’s likely a scam.
“Let me share a personal story.” Andy starts, “I once had someone approach me in the middle of a restroom during a conference, trying to sell me an alternative to a product being pitched at the event. I told him, ‘Do you realize you’re pitching me in a bathroom?’ It sounds funny, but the context immediately told me this wasn’t legitimate.”
Scammers often hide behind anonymity or piggyback on trusted platforms. If you see unsolicited offers in the comments of a podcast or a social media post, don’t bite. A credible investment will never require you to act hastily or come from an unverified source. Remember to always ask, “Does this setting make sense?”
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Beware of offers that are “too good to be true”
If something sounds too good to be true, it probably is. Scammers prey on our desire for quick, easy wins. They’ll promise massive returns in no time with little effort. To be blunt: there are no shortcuts in investing.
Real opportunities often require hard work and carry risk. One of the biggest mistakes young investors make is chasing “get rich quick” schemes. If someone guarantees results or claims their opportunity is risk-free, that’s a giant red flag.
A good deal is built on tangible value and serves a legitimate market need. If you find yourself emotionally attracted to an offer, stop and reassess. Check the details. If it’s too perfect, dig deeper or walk away.
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Emotional triggers are red flags
Scammers are experts at manipulating emotions. They want you to feel fear, greed, or urgency—emotions that can cloud your judgment. For example, they might warn you that you’ll miss out on an “exclusive deal” or play on your fears about missing financial security.
There are so many victims who lost their life savings because they let their emotions guide their decisions. Andy even recalls one woman who fell for a Bitcoin scam because she feared being “flagged on the blockchain.” The scammers drained her accounts and even convinced her to take out loans to “fix” the issue.
When you feel strong emotions during a pitch, take a step back. Logic and due diligence, not emotions, should guide your investment decisions.
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Audited financial statements
When evaluating an opportunity, one of the first things to look for is audited financial statements. Why? Because they’re hard to fake. An audited statement ensures a third party has reviewed the numbers and confirms they’re accurate.
Without this level of transparency, you’re taking a leap of faith. Scammers can—and often do—inflate or fabricate financial data to lure in investors.
Understanding financial statements is a universal skill. Whether it’s a business, nonprofit, or investment opportunity, the numbers tell the real story. Learn how to read them. If a deal’s financials aren’t clear or audited, that’s your cue to walk away.
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Evaluate marketing materials
Flashy brochures and over-the-top presentations are red flags in themselves. Legitimate opportunities don’t need to rely on gimmicks to sell themselves. In fact, the best deals often have simple, straightforward materials focused on the facts.
A mantra to reference here is: “The bigger the brochure, the worse the deal.” Why? Because when a deal has no substance, it needs extra packaging to look appealing.
Focus on the numbers, the track record, and the audited data. If all you’re seeing is fluff—glamorous photos and lofty promises—ask yourself what they might be trying to hide.
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Understand the leadership and team
Behind every great investment is a strong team. If you don’t trust the leadership, you should not invest—period. Research who’s behind the opportunity. Are they experienced? Have they successfully delivered in the past?
One common trick scammers use is to inflate résumés. They might tout unrelated achievements or claim “serial entrepreneur” status. That’s meaningless if they don’t have direct experience relevant to the current project.
Credibility matters. A strong leader inspires confidence and has a track record of integrity. If you can’t verify their claims or they seem evasive about their history, take that as a red flag.
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Legal scams exist
Not every scam breaks the law. Some operate within legal frameworks but still exploit investors unfairly. Casinos, for example, are legal but designed to take your money over time.
In the investment world, legal scams often involve poorly structured funds or investments with unfavorable terms. Just because something is “legal” doesn’t make it ethical or profitable.
Read the fine print. Understand how the deal works and who benefits most. If the scales feel tipped against you, trust your gut and move on.
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Start with what you understand
When you’re new to investing, stick to what you know. It’s tempting to jump into exciting, unfamiliar opportunities, but complexity can mask risks.
Too many people lose money because they didn’t fully understand what they were investing in. Warren Buffett calls this your “circle of competence.” If you don’t understand an opportunity, don’t invest in it.
Start small. Choose industries or companies you’re familiar with. As your knowledge grows, you can expand your portfolio. But always make sure you fully grasp the fundamentals before committing your money.
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Position sizing and risk management
Risk management is a cornerstone of successful investing. No matter how promising a deal seems, never put all your eggs in one basket.
Diversification is your friend. By spreading your investments across different opportunities, you reduce the impact of any single failure.
For example, if an investment requires $100,000 and that’s all you have, it’s probably not a good fit. Start with smaller position sizes and gradually scale up as your confidence and portfolio grow. Managing risk is about staying in the game long enough to seize future opportunities.
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Continuous education is vital
Finally, never stop learning. The financial landscape is always evolving, and staying informed is your best defense against scams. Read books, take courses, and follow credible experts.
Remember, the more you know, the harder it is for someone to take advantage of you. Make education a priority, and you’ll not only avoid bad deals but also position yourself to spot great ones.
It’s important to go into every investment with as much knowledge as possible. These ten key principles will protect your money and allow you to invest wisely. Stay vigilant, stay informed, and happy investing!