Are Mormons Gullible Investors?

By Richard Halverson Many years ago I worked for a large investment organization in Missouri. (As you read this article you will find it interesting to know that Missouri refers to itself as the “show me state.”) A colleague of mine and I were in the palatial New York offices of one of the country’s leading investment bankers. After a long and animated discussion regarding a new investment offering the senior member of the investment banking team said, “This offer is so flaky the only place it will sell is Salt Lake!” I started to laugh, thinking he was poking fun at me since I had grown up in Salt Lake. However, I quickly realized this guy had zero sense of humor and he thought I was from the Midwest. Worse, everyone else was agreeing with him. On the flight home I asked my colleague, “What was that Salt Lake crack all about?” He said, “Don’t you know that Salt Lake is the investment scam capital of the country? Those people out there will buy anything.” I have many more years in the investment business now and unfortunately I have come to realize there is considerable truth in the reputation that Salt Lake has to this day. The Intermountain West has been home to some big financial scams. I know that members of the Church are still sufficiently large in Utah that most things that go on in the state are a reflection of the Mormon people. I have also noticed the Brethren counseling members on this subject from time to time. Although these days I hear them spending more time counseling members to get out of debt. I think unwise speculation and unwise and unwise accumulation of debt may have some common roots. Mormons may be More Gullible than Other Investors Over the year I have spent some time thinking about why Mormons might be particularly vulnerable to unwise speculation and/or debt management. Most of the factors I have come to believe contribute to the problem are factors that are general to members of the Church everywhere and not just Latter-day Saints in Utah. These are not scientific, they are just my opinions. See if they don’t make sense to you.

First, most people tend to judge others by themselves. If you are striving to be honest and always tell the truth, there is a tendency to assume others will do the same. Regrettably, that is not always the case. Honesty is a wonderful attribute. However, if it leads to naivete it can be dangerous. Christ was honest but he never for a minute misunderstood where the Pharisees and Sadducees were coming from. He knew when they were trying to trick him.



Second, Latter-day Saints have respect for people serving in visible Church callings. A salesman tells us that Bro. X, who happens to hold a prominent Church calling, is on the board of directors of the company. Or we are told that Bro. Y – who is a beloved stake president – is a big investor. Or the person doing the selling is on the high council of his stake. There is a tendency for us to set aside our own critical study and plunge in because people we respect spiritually are involved financially. This is not a leap of logic we are wise to make.



Third, some Mormons are guilty of what I call righteous greed. We sometimes reason that since we pay our tithing, attend the temple regularly and always get our visiting teaching done in the first half of the month we are entitled to a blessing. And the blessing we want is a lot of money. (It may not be the blessing the Lord wants for us.) We convince ourselves the Lord will make the get-rich-quick scheme or the debt we are looking at work out to our benefit. We reason to ourselves that as soon as we are rich we will use the money to retire to a lifetime of Church service. (Actual observation suggests many members first want an expensive home and a luxury car before helping out the poor and giving Church service.)

Avoiding Speculation How, then, can a person avoid unwise speculation? There is no substitute for hard work, investigation and looking at things with a critical eye. I am not talking about avoiding risk. All investing involves risk and investing is good. I am talking about understanding risk.

Make sure you know how the investment works. Behind every investment is a business that generates income. Be certain to understand how the business works and what the risks to its success are. If you hope the investment is going to pay big dividends, where will the cash come from? If it is supposed to appreciate, what will cause that to happen? One popular example among Mormons is the pyramid-marketing scheme. You are recruited to join a company as a dealer. You can make money by selling the product or by recruiting other dealers to work under you. Many of these companies sell real products and a few people make real money. However, when you study how it really works you discover the only way to make real money is by recruiting a lot of people to work under you. If you run the math you will typically find 80% of all the dealers are in a deficit position all the time. Is it really attractive if you have an 80% chance of losing money? Is it really attractive if you make money but only by recruiting a lot of friends who wind up in the 80% losing money? The way the math works, it is almost impossible for everyone to make money.



Read the prospectus or offering statement. All publicly distributed investments should have one. I know they are absolutely mind-numbing to read, but they have a lot of useful information. Pay particular attention to the section on risks. Often the items in here are required boilerplate. Things that say something like, “There can be no guarantee the boss will come to work tomorrow.” Other risks are worth finding out more about. Statements like, “The Company has never sold this product before, needs to win a patent suit before it can, and will then be in competition with ferocious competitors.” (They probably won’t word things just like this, but you get the idea.) Incidentally, if you are not offered a prospectus, ask for one. If the salesperson does not have one, be very suspicious. Listen to his explanation – then ask an attorney if the explanation makes sense.



Dig to understand if there are any conflicts of interest that run counter to your interests. These are situations where insiders can make a lot of money at your expense. I think of a real estate partnership that was sold in Utah. The partnership was raising money to buy and develop a piece of land. When the facts were known, the man who was president of the general partnership (and an allegedly good member of the Church I might add) was the sole owner of a private company that had an option on the land. This means the president controlled the land by investing almost none of his own money. He was going to buy and sell it in his shell company with the investors’ money and reap a huge profit. To make matters worse there was going to be an 8% brokerage fee paid. Guess who owned the company that was getting that? Then to add insult to injury the general partnership, owned by the president of course, was taking a huge fee for raising the money. Of every $1000 invested by investors $320 wound up in the president’s pocket before any development began. Is it any surprise the ultimate development was under capitalized and never succeeded? (The president made a bundle, though!) These can be tough to discover. Real scam artists are very good at hiding these facts. But common sense and the offering statement will help you identify most of the conflicts.



Are you counting on someone dumber than you to buy the investment from you when you are smart enough to think it is time to sell? Don’t play the greater fool game ‘lest you learn the hard way who the greatest fool really is. Perhaps a classic example was the Internet stocks. That speculation was hardly exclusive to Mormons. We have saw companies that were barely real companies snapped up on the original public offering and given values in the billions just because they claimed to be Internet stocks. Talking to buyers you basically heard, “Sure they look overpriced but they are moving up fast. So after I double my money I’ll get out.” I would ask, “Who will buy it from you then? You think it is overpriced now. According to that thinking it will be doubly overpriced when you want to sell it!” The answer was, “I don’t know, someone will.” (Translated, I’ll find a greater fool than me.) I am sure you have not forgotten what happened to most of those companies. Even the survivors fell over 90% in value.



Understand how the investment is priced. If it trades on a public exchange or does the company tell you what it is worth?



Does success of the investment depend upon the successful occurrence of complex events? Remember the chain is no stronger than its weakest link.



Is the investment time sensitive? Money invested in an option that must be exercised before a certain time is at risk. Savings needed to pay college tuition that are invested in a volatile asset are at risk. A few years ago there was a story covered in the papers. A student preparing to go medical school in the fall opened an account with an online trading service in the spring. He invested all the money he had saved for medical school in volatile high tech companies. Then he margined them, meaning he borrowed money to buy more. By September of the stocks plummeted and he got wiped out. But he apparently had thought of a safety net. He is sued the broker. Despite the fact he electronically signed a statement he knew what he was doing, he went on to claim that they should have known better than too ever let him do it. Brokers do have a legal obligation to qualify their clients but this is ridiculous. (If he ever does get through medical school I’ll bet he’ll be the first to complain about frivolous malpractice suits.)



Does the potential return seem to be very large? Be particularly careful if at the same time the risk seems small. Free capital markets simply do not work that way. Potentially large returns are associated with large risks, etc. I am aware of a terrible case that sucked up a number of Mormons in a part of the country outside Utah. The principles of the company were not Mormon but some of the sales people were and this scam spread through the Mormon community like wildfire. This company asked people to invest with them. They used the money to buy accounts receivable at a discount from hospitals. Allegedly collecting money is so difficult for hospitals they were willing to sell them to the company for $0.70 on the $1.00. The company was very efficient in filing insurance claims and collecting so they could make a big profit. If you know anything about the medical business, you know that to this point it makes sense. Other industries do it too. It is called factoring. I was asked to look into the opportunity. Soon there were a lot of things that didn’t make sense. The investors were being promised 20% dividend returns. There was no prospectus. It looked like a security but it was not registered with the SEC. If the margins were this huge, why wasn’t every finance company in America getting in? Then a company representative told me that the president of the company was a millionaire many times over and liked paying this much out to share his good fortune with other people. That’s when I hung up the phone. I don’t want to offend my readers, but only Mormons will buy a line like that. It just doesn’t happen in the real world. For several years the company kept paying the dividends and I looked like an idiot. Then without warning the feds swooped in and shut him down. It was a huge Ponzi scheme. That means they were using the money from new investors to pay dividends to the old investors. The high dividends attracted more investors, etc. The president is now in jail and I have friends who have lost their retirement.



Will you have to borrow heavily to make the investment? Borrowing increases the risk.



How serious would it be to you if the investment fell in value or cut its dividend and how likely is that to occur based on history? There is an old adage of not investing money you can’t afford to lose. This tends to over simplify the problem. In most cases we aren’t going to lose it all. But we may lose enough to hurt. The question is making a reasonable assessment of risk in your situation.



How stressful would it be to you financially or emotionally if the investment resulted in a substantial loss? Don’t forget to consider your spouse and family when you are considering the potential stress.



Understand how the person selling the investment to you is being compensated. They have a right to make money but the commission should be reasonable. If not their integrity may be questioned. For example, you may not be aware securities brokers generally make a much bigger commission selling a new underwriting than an existing security. That is especially true if it is hard to sell. The problem is that many brokers in their eagerness to earn money push the security to people who should not own it. The broker making good money doesn’t mean it is bad; it is just something you should think about.



Are you getting a high pressure, emotion filled sales pitch? Pressure is a bad sign.



Does there seem to be a frenzy associated with this investment? Investment frenzies often go much further than they should. The problem is they end abruptly, without warning and with great loss to the investors holding the “old maid” when it is over.



If it seems to be too good to be true it probably is. I know it is an old clich but it is accurate.