scams and schemers

The Age of Bullshit Investments Is Back!

Running back Arian Foster #23 of the Houston Texans looks on prior to the start of the game against the San Francisco 49ers at Candlestick Park on October 6, 2013 in San Francisco, California.
“Nobody ever got fired for buying Arian Foster.” – investment advisors, soon Photo: Jeff Gross/Getty Images

There was a time, not too long ago, when a fool who wandered into the world of investments could very well be separated from his money with the help of any number of dumb, overpriced, or downright fraudulent schemes. Then, in 2008, the economy went into freefall, and everyone who had money left held onto their checkbooks a little more tightly. Fear bred caution, and some of the worst offenders in the dumb-money chase were forced to close up shop, or at least become a little more discreet about their advantage-taking.

Now, with five years of air between Lehman Brothers and the present, the seal has been lifted. Athletes and virtual currencies are being traded alongside Ford and General Electric. Venture capitalists are pitching start-up stocks to the unwashed masses. And later today, the SEC is expected to propose new rules that will make it even easier for companies to fleece the unsuspecting public.

Yes, ladies and gentlemen, the age of bullshit investments is back.

Look around today’s markets and you’ll see a surfeit of senseless investment opportunities wearing the cloak of legitimacy.

You’ll see, on page one of the New York Times, a start-up called Fantex touting a new investment vehicle that allows fans of NFL running back Arian Foster to support his career by purchasing stock that gives them a share of his future earnings. (What didn’t make page one: Foster’s career-worst game the very next Sunday.) This investment opportunity, which will appeal mainly to those too young to remember Bowie Bonds, is a terrible idea on multiple fronts: It bases returns on the unpredictable performance of professional athletes, it gives stock that can only be traded on a private, relatively illiquid exchange, and its single-athlete stock can be converted into common Fantex stock whenever the company feels like it.

Look harder, and you’ll see companies like Goldman Sachs throwing millions of dollars at hare-brained schemes like Motif Investing, a “theme-based stock investment platform” that allows rank amateurs to make up “motifs” of stocks they think are going to behave in a certain, coordinated way. (Professional stock traders do this all the time, without calling it a “motif” strategy — but they don’t charge ordinary people what can amount to double-digit fees, nor do they base their investment decisions on “Companies with lots of Facebook likes,” as Motif suggests.)

You’ll see Bitcoins, the everlasting fascination of Silicon Valley crypto-geeks, being not only spoken about as an investment-grade commodity despite having higher volatility than your average Baldwin brother, but inspiring entire investment vehicles (one of which is structured by celebrity twins) that give ordinary investors as well as the tech-savvy crowd the chance to lose money when the fad runs its course. You’ll also see art dealers trying to convince you that betting on the paintings of unknown artists is a sound portfolio move.

Some of these bad ideas spring from the normal irrational exuberance that comes with an economic bounce-back, and the fact that many investors are more willing to jump into murky waters than they were in 2008. But there are other factors in play, too. The JOBS Act, for one, was a post-crisis law that was meant to make it easier for companies to raise money. Instead, by paving the way for equity crowdfunding and making it possible for private investors to hawk their services like Cracker Jack vendors at Yankee Stadium, the law opened a Pandora’s box of truly unwise investments.

Thanks to the JOBS Act, there are now crowd-funding bazaars that make gambling in the markets as easy as picking a Spotify playlist. There’s also the newest West Coast fund-raising trend, the venture capital syndicate, which makes it possible for average shmoes with little to no market expertise to enter into highly risky investments with early stage start-ups, and which has put the sentence Miley Cyrus could be the next big tech investor” within the realm of the possible.

There’s a lot to take in, between the NFL-stock-trading and the Miley Cyrus venture capital buffoonery. But the upshot is that between the rise of the social web, the recovering economy, and the deregulatory impact of the JOBS Act, it’s now easier than ever for you to lose money in fun-sounding ways. This is fine if you have disposable income to spare, which many of the people who meet the SEC’s threshold for being an “accredited investor” (someone with a $1 million net worth or an individual annual income of $200,000) do. But other accredited investors are doctors, lawyers, and workaday tech nerds who know next to nothing about the stock markets, but are gullible enough when flashy investments are shined in their faces. For these people, no number of “treat it as casino money” caveats will suffice; they will inevitably succumb to the pitch, and they will lose money.

I’m not the only one noticing that things are getting dangerous. Felix Salmon says that years of near-zero interest rates and the JOBS Act gold rush mean that “even the smart money has started funding companies at utterly bonkers valuations.” Josh Brown, a financial advisor and CNBC regular, told me in an e-mail that the “ludicrous” investing climate “is a byproduct of the giddiness we’re seeing amongst the owners of financial assets. We’ve eclipsed the 2007 peak of household net worth but the makeup is very different. More has accrued to the upper echelon and the lesson that group has learned about the nature of investing is that even if we blow up, the Fed and Congress will ensure that come out of it in even better shape.” And the SEC has been busting record numbers of petty thefts and boiler-room schemes — many of which reflect the intersection of well-intentioned but underinformed investors with slick profiteers claiming to have access to the next big thing.

The truly scary part of what’s happening now is that it’s not a particular asset bubble, nor the sketchy practices of a coterie of bankers, that’s endangering the investment portfolios of normal people. It’s the deregulated system itself that poses the threat. Unlike in 2008, this exuberance won’t end in a sudden crash, brought on by shady practices at large investment firms. It will be a slow flow of assets from the information-deprived to the information-rich, in the form of fees and other completely legal wealth transfers.

Whatever the cause — be it interest rates or income inequality, the JOBS Act or simply the state of the S&P and the folly of man — make no mistake: The investment environment is as hostile to ordinary investors as it’s been in many years. The best course of action is simply to do very little — to invest in low-cost index funds, or just follow Harold Pollack’s now-famous Financial Advice Index Card. But if you must invest in things beyond the ordinary and boring, watch your wallet: Your next big mistake may be just around the corner.

It’s Crazy Investment Time Again!