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Scammers always try to camouflage their actions with a veneer of an appearance of truth. Since the Financial Services Act it has been much harder to create spurious investments, but one loophole remains, that of selling real actual things ( or claiming to). Whisky, Champagne, gems, art and ostriches spring to mind.
Over the past couple of years many things have been touted as investments, and many people have lost serious money backing them. Some people have also made money. Real Investments ( aka Alternative investments) however are fraught with hidden dangers.
It is an all too little known fact that the protection afforded by the Financial Services Act only applies to Collective Investments.
This is legalese, but it means an investment where you are only one of a group of owners of an investment. Typical of these are Unit Trusts. The fund ( investment) is owned, collectively, by all the unit holders. Invest in these and there is a whole panoply of specialised legislation that is drawn up on the basis that you are indeed being sold investments, and there are very tight rules governing how this can be done, and a compensation process for when it goes wrong.
This is all very well, but it cannot have escaped your notice that recently there have been many schemes in the media which invest in what they refer to as Real Assets. Real Assets such as Ostriches, or Champagne, or Whisky, or coins, or gems. These are not covered by the Financial Services Act.
Real Assets is not really a suitable term for what can often be little more than chimeras, with any figures for gains either based on historic data extrapolated ( either in fact or by implication), or even spurious ( based on maverick data or even no data at all).
Real Assets fall into a two, overlapping, categories:-
Things that most people would admit have a value to the collector, but no inherent value.
Antiques, paintings, artworks, jewellery, coins ( all ages), special editions of anything, classic cars, stamps. Remember that - Picassos have no inherent value, it is just a matter of fashion. In many of these areas , and classic cars is the most well known recent example, bubbles rise and burst. As a rule of thumb by the time the press are talking about the success that people have had by investing in any collectible it is a damn good sign that a bubble has begun and that now is NOT the time to buy.
Things presented as having an inherent value, and / or an investment aspect.
Ostriches, Wines, Champagne, Whisky, and the top end of collectibles, esp. diamonds, gems and coins. Also includes land when packaged as an investment ( rather than a place to live or holiday).
Now in all of these things there are real markets. There are people who buy and sell and who make a good living. There are people who buy, and hold, and sell later at a profit. There is indeed a real trade in real assets.
It is precisely because there is a trade , and one that often seems quite interesting, that the scammers can make their killing.
This is very different to the Pyramid Scam. ( In the Pyramid Scams there is either no product, or no real market).
There difference between a scammer and a real honest dealer is that the scammer talks about money and the profit that you can make. To the real dealer your profit is incidental, indeed in many of the areas he would think that for you to be looking to profit you must be a fool who does not know what he is doing, or an expert. ( And of course no real expert would mention profit until AFTER they have closed the deal....)
For example:-
1) "This is a very nice X. X's of this quality are unusual, and can be expected to appreciate over time because they have always been popular and , as you know, the Japanese have started to buy. Personally I like it, and , if displayed well, it makes a very fine decorative item".
2) "Buy X today for £100, and we are sure that in five years you could sell it for £300. Don't worry if you know nothing about X's, we've done all the hard work for you."
The first man is a real dealer who assumes that his audience knows his X's from his Y's. The discussion of value is really just so that the collector can rest easy that he is not wasting his money, and will at least have the pride of ownership without taking a big hit on the resale value, (or be able to mollify the wife - most collectors are men). The second is looking for a fool.
The first, if he advertises at all, does so in specialist magazines read by those involved with the subject. The second advertises in the mainstream media ( Sunday Papers are popular. Contrary to popular belief all that you read in the papers should not be taken at face value, and the fact that space was bought in the Sunday Universe does not mean that the Sunday Universe has checked it out and approved of it. It is MONEY that buys you advertising space, nothing else*).
1) They advertise in the general media. Scammers do not normally advertise in the specialist publications because the readers will not fall for their junk. Be very sceptical of anything being promoted as an investment in mainstream media by a company that YOU have never heard off unless it is regulated by a suitable body, ( normally, for adverts for most legit general public investments FSA, SFA, SIB, PIA, or IMRO).
2) They talk about their investments having the solidity of a real thing, something you can touch, as if this is supposed to reassure you. Old Bangers are real, but that does not make your 1976 Allergic a classic car. ( In fact references to the solid reality of an asset should be the biggest warning sign - you are almost certainly NOT going to covered by the Financial Services Act).
"Buy X's, hold it in your hand and feel the value of this rare gift"
"How often can you have your cake and eat it? With X's this beautiful item can
provide both investment and pleasure".
3) They ( if they have been well organised) do the old CIA dirty tricks**. They take advantage of the fact that poor journalists have only one aim in life - to find something new to write about, and that they are often too lazy to do their research properly, preferring to simply rehash press releases. So the scammer creates press releases with lots of spurious, or even fake, detail, and waits. Soon he will be rewarded with an article in the press indicating that investments in X's could be promising. The scammer then extracts a suitable quote, and plasters this ( or these) all over his information packs and adverts. So when you, the mug, react to his advert you get some or all of the following included in the bumph:-
"X's are undervalued" - Daily Word
"X's could be the nest egg of the future" - Sunday This
"X's - demand set to outstrip supply, could be a good investment", or even just
" X's....a good investment" or just "a good investment".
Some might even take quotes out of context, turning "not a good investment" into "a good investment".
Some ( esp. if they do not expect the scam to have a long life, and knowing that you are unlikely to check them) might even simply invent quotes that sound good.
4) They will often quantify past or future gains in a manner that looks convincing, but is not. E.g. buy an X today and make Y over 5 years, where Y is greater than 12%pa.
5) They seek praise by association. For example they may quote / misquote genuine authorities. For example let us say that there exists a Society of Collectors of X. They might quote "demand is growing and prices have risen 20% in just 6 months" - Society of Collectors of X report. First thing to note is that that may not be a true quote. Second thing to note is that it does not say what the demand is for. It is implied that the subject is X's, but there might be lots of types of X's, and only one type is doing well, whereas the type being sold are in much less demand.
In the "buy for the Millennium Party" Champagne sales pitch much is made of a report by a major financial institution that predicts a shortage. The company concerned is well annoyed because the report is being used without permission, and it is old, out of date, and no longer represents their views. They no longer consider that there will be a shortage. (Post Millennium adendum, and do you remember it being hard to find champagne for your party?).
6) They seek to exploit the "conspiracy" fear. For example they will claim in defence that the establishment are trying to keep their profits for themselves, and not letting in new players, and that is why the industry is dishing the dirt on them. This is always a good one because people love to believe that they might put one over on the establishment. It appeals to the rebel in all of us, and at the same time explains why the establishment keep saying that it does not work, the "well they would say that won't they" scenario.
7) They seek to demystify. Actually they don't. What they often say is something along the following lines.
"This is a unique opportunity to purchase fine X's. It is a complex area, but we will guide you and so you do not need to be an expert" "Now, at last, is an opportunity for the non-expert to invest in this lucrative area, which the cartels have kept to themselves, pretending that it is all too complex, but we have done the legwork for you"
Think about it. If they were experts in this field WHY are they seeking to sell to you? Is it perhaps because non-experts will pay more money than the real market cost? Is it because non experts can be stuffed with rubbish?
If it was so good they would be buying it all up themselves.
8) They take advantage of the fact that the true market is far more complex than the lay person can know. For example most people know that Scotch is matured in oak casks. What most people do not know is that there are oak casks and there are oak casks, and that putting the same whisky in two different casks produces two very different drinks. Come to that if they might simply con people. If they claim to be selling ABC in good casks how will you know if they actually give you it? It might not be ABC, and it might be a cheap cask. Would you know? Could you tell?
With regard to Scotch you also have the small matter of taxes. Scotch in the barrel is no use to anyone, you have to get it out, which means paying taxes, which means, that, even if the deal is for real, you are probably better off popping over to France and stocking up there. ( This does not damage the distiller, only the UK retailer and Excise man are upset).
9) They either mislead or simply fraudulently do not do what they claim, knowing that buyers will either never find out, or find out too late that they have been conned. If sprung by the media or law, they usually shout about how everything was going well, and if it was not for the meddling so and so's everything would have been OK. ( Pretty much the denoument in Scooby Doo really, and just like that program, the same every time).
10) The prices that they are selling at are nothing like the ones in the real world. For example the true market in X might well involve buying them for 200 and selling them in a few years for 400. The scammer will point out that X normally doubles in value every few years, but will sell X to you for perhaps 250, or even 2500 ( their greed is rarely finite ), which rather makes a mockery of the whole deal.
I think it has been made clear that Real Asset Investments, ( or Alternative Investments), are not for the non expert. Let us assume that you have managed to avoid the blandishments of the scammer, but have been turned on by the Antiques Roadshow and fancy a dabble. It's understandable, I myself collect old books about Iceland and picked up a first Edition of Letters From Iceland by WH Auden ( yes, the poet) for a song that will no doubt prove to be my best ever investment in years to come, ( though Letters from High Lattitudes by Lord Dufferin is the better read).
You should understand a number of factors:-
1) If buying from a dealer who knows the subject you will pay a large margin over the real value ( as set in the interdealer market). It is a way of buying the best, but do not expect a quick return. Buy because you want to own it as a collector. A dealer might make a margin of 30-100%. This compares with the non discounted 5-6% typical of Unit Trusts and PEPs. And when you sell you face more costs ( either directly at auction, or indirectly via a dealers margins).
2) The asset will not produce income. This also makes it hard to make money as normal assets will produce 2-4%pa. Not a lot, but over 5 years gives them a good head start.
3) The market may be subject to wild fluctuation. Artists rise and fall in the critical eye, periods of antiques wax and wane in popularity, geologists have a habit of finding new deposits of gems and diamonds. As a rule, by the time any particular thing is being promoted on the grounds of previous growth it is probably wise to avoid it. OTOH while the big money is made buy buying into the Next Big Thing before everyone else you can only do this if you are an expert, and even then most Next Big Things take a long time to develop, sometimes never.
In short, to make money in Alternative Investments you either need to be an expert buying from non experts, or interested in a Cinderella subject ( which amounts to the same thing) or a dealer yourself. In other words, as a non expert, don't touch any such scheme with a barge pole if your primary motive is financial gain - you will almost certainly be seen coming and fleeced. Buy because you want to collect.
This selection of links is valid at time of writing. They are all US Gem dealers and experts, and are clearly seeking to deal with Collectors, rather than investors, and who all seem quite tired of the "invest in GEMS!!!" scammers over there. For a totally different approach just run +ostrich +investment or +whisky +investment on Infoseek and keep your hand tight on your wallet!
Klaus G Klement Plain speaking US gem dealer.
National Gemstone ( with price graphs that show no excitement whatsoever since a series of lost shirts in early - mid eighties).
And finally, if you are in any doubt as to whether you will be protected by the law, and what questions to ask about regulation etc, check out the Financial Services Authority site. The FSA is the lead regulator for UK Financial Services.
* I myself contacted Private Eye in 1996 to point out that they were running an ad for a pyramid company, exactly the sort of company that would normally appear in their editorial. The ads stopped, and later the company was reported as collapsing. As to the ostrich schemes, you probably saw the adverts yourself.
** It is said that in Chile the CIA helped sink Allende by issuing reports to the media about ( non existent ) riots in Chile. These were reported by the press outside Chile, and then picked up by the press in Chile, who reported the riots. These were read, and supporters of the putative rioters rioted......self fulfilling prophecy.