Avoid those Mottbabs like the plague

By MARY HOLM

Q. I read your column with other equally learned authors from other similar publications and see that fundamentally the goal is the same: take one's money, place it correctly and watch it grow.

I have a long background in law enforcement and this money/investment/yield area is a new learning curve.

Basically what I am asking is to invite you to see arguably the most powerful business programme today. In a nutshell, take a $495 investment, have it returned fully in as little as four months, with a forecast further return of $40,000 a month in two to five years (overwhelming yield return).

This is done not by changing everyday spending, just where it is spent.

On Monday night at (place deleted), millionaire (name deleted), on track to be a billionaire, will give a presentation on how this business works.

Many other presentations out there from people who are millionaires cost from $45 to $1500 plus, showing you how they did it and how you can do it too.

Citigroup announced on BBC news two months ago to watch out for this hugely growing and successful Australian franchise-type company, that it will be the business of the future.

I do not doubt that you will hear about it. But I sincerely hope you can take the time to at least have a look, even if to arm yourself with information to enhance your current portfolio.

The reason I am writing is to identify people I wish to be in business with.

I find your knowledge in the money-handling battlefield impressive and would be an asset in any person's company.

I think you do a great job and have probably helped hundreds of people, something I like doing.

I am not powerful enough yet to create the required credibility and need a little help for that, hence this email.

A. Sorry, but you'll never gain any credibility with me while you're talking $40,000 monthly returns on a $495 investment.

Talk about too good to be true. This is ridiculous.

I've deleted the name of the "guru". I don't want to give him any publicity.

Also, I don't want to be sued, as I haven't checked him out.

But I don't need to. I've seen too many others like him.

I'm going to be blunt with you. You are either extremely naive or a henchman of this "millionaire on track to be a billionaire" (we'll call him Mottbab for short), hoping to entice other extremely naive people.

The sad thing is the naive folk are out there.

The Mottbab probably will, indeed, become a billionaire, using all their $495s and, no doubt, other money he later extracts from them.

And they will probably also be talked into somehow fleecing their friends and relatives. Much of that money, too, will end up in the Mottbab's bank account.

The only ways I know of to get rich quick are to win a lottery or to be the one in 10 or 20 who is unusually lucky with a risky investment - often a highly geared investment.

In both cases, there's also a big chance you will lose. And, if you're geared, you might end up deeply in debt.

Economist Peter Bernstein, in his excellent (if quite technical) book Against the Gods - the Remarkable Story of Risk, spells out what he calls the most fundamental principle of investment theory.

"You cannot expect to make large profits without taking the risk of large losses."

I have never heard of anybody getting rich quick by following a Mottbab - except the people who work with him. (It is always a him.)

On the other hand, I've heard of more than a few people who have lost plenty, and sometimes also put in huge amounts of time and energy.

And, by the way, Citigroup is not too happy about having its name linked to this.

Says Maggie Grady, head of public affairs with Citigroup Australia: "I have not heard anything about this.

"If someone in Citigroup in London, for example, had said anything about an Australian company, I would have known about it.

"Citigroup does not endorse this type of proposal."

I suggest you put your law enforcement hat back on and view the Mottbab with extreme suspicion.

For the benefit of other readers: This letter did not arrive on April 1.

* * *

Q. Since you persist in describing single share investment in vituperative terms, a lesson in reality will not go amiss.

I bought 10,000 Sky City shares in 1999 for $78,000. They are now worth $157,000. I have received $22,000 in tax-paid dividends (banking $4200 today, thank you). Some "fools game" eh? How are your "diversifiers" doing? Not so good if the 54 per cent loss is an example (many such, you said).

I note that investors in Winz would, after 5 1/2 years, be exactly where they started (worse off, as they missed out on single share opportunities, eg, Briscoes, Sky City etc or even bank deposits).

They will have to see huge growth in the remaining 2 1/2 years to get a return.

Forsyth Barr has upgraded Sky City to $9.60. But even if it dropped to $5 I would still be ahead. (But of course I would have - because I'm disciplined enough - sold long before.)

Yes, in 2007, if Sky City is still well ahead, it will prove something: astuteness. (You say it would prove nothing. We disagree and will see.) You are guilty of the same error you accuse others of - predicting the future from the past.

Share diversification has, in the past, brought rewards. What guarantee is there that it will in the future?

Your colleague's year-end review got it right - "Astute investors rewarded while all others declined sharply".

There is no reason an individual with years of investment experience is not able to get it right more often than not.

A. Something told me when I saw the subject of your email - "Wrong again. Trust you will for fairness/balance publish this as you have seen fit to have another go" - that you were not a happy chappy.

But you are. You've made heaps on an investment in a single share. Well done!

As I said in my answer above, about the only way to do stunningly well in investment is to take on lots of risk and get lucky. In your case, the risk is lack of diversification.

You will no doubt be protesting that your choice of share wasn't luck, it was "astuteness".

People who invest in one share, property or whatever and do well out of it almost always put it down to skill. Those who do badly almost always put it down to bad luck. Funny, that.

Anyway, Robert Kiyosaki would approve of your strategy.

"Playing it safe and going 'balanced' on your investment portfolio is not the way successful investors play the game," he says in Rich Dad, Poor Dad. "To make progress, you must first go unbalanced.

"If you have any desire of being rich, you must focus. Put a lot of your eggs in a few baskets."

But Kiyosaki admits to having been in deep financial trouble several times in his life. Evidently he can cope with that. Most of us couldn't.

I have much more respect for the man I quoted above, Bernstein.

"Occasional large gains seem to sustain the interest of investors and gamblers for longer periods of time than consistent small winnings," he says in Against the Gods.

"That response is typical of investors who look on investing as a game and who fail to diversify; diversification is boring. Well-informed investors diversify because they do not believe that investing is a form of entertainment."

To answer some of your points more specifically:

pf* There's no doubt about it, investors in Winz, or any other international share fund, have done extraordinarily badly in recent years. But history shows that those who stick with such investments do well in the long term.

pf* That last sentence will have you once again accusing me of using the past to forecast the future. As you note, I have criticised others for doing that. So I'll make myself clearer.

Over the short term, it doesn't work to use the past to predict the future of investments. Houses are growing fast now, world shares are not. Next year, that could well be reversed.

Nor should you predict the long-term future of a single share, property or other risky investment from its past. Unpredictable factors can strike at any time.

The past can be helpful, though, in predicting long-term returns on whole asset classes, such as shares or property in general.

pf* You say you would be disciplined enough to sell Sky City shares before they dropped far.

Maybe. But when a share dips, nobody knows whether it's headed for disaster or is just wobbling for a while.

It's far harder to know when to sell in practice than in theory. If you consistently do it well, you are exceptional.

pf* If Sky City is well ahead in 2007, it will prove that Sky City has been a good investment. That's all.

Not even the most amateur researcher would draw any broader conclusions from a study of a single share. The minute you start looking at lots of single investments, the story is quite different.

pf* There's no guarantee in any risky investment. If you want guarantees, go with Government stock. And accept the lower long-term rewards that come with a guarantee.

pf* I don't always agree with what my colleagues write.

Did you notice, though, that Brent Sheather said in last week's Weekend Money, "If we resist the temptation to overweight one particular sector or, worse still, one stock, and instead retain a diversified portfolio. then, whatever the economic conditions, part of our portfolio will be looking clever"?

I can buy into that one.

pf* Yes, any investor, experienced or not, will probably get it right more often than not.

That's because, over time, most investments have positive returns.

Still, the average investor who diversifies will - for a given level of risk - do better than the average non-diversifier.

If you think you're above average, go for it. When I look around at all the bright investment analysts working full-time for financial institutions - and often getting it wrong - I would never feel confident I could beat the market.

Peter Bernstein - yes, him again - calls diversification "a kind of free lunch at which you can combine a group of risky securities with high expected returns into a relatively low-risk portfolio".

Diversification gives you something, risk reduction, for nothing. If you want to turn away that free lunch, that's your choice.

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