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When a Stranger Calls With a Great Investment Opportunity

Common sense can determine if an offer is on the level

When a Stranger Calls with a Great Investment Opportunity - phone pitches


Learn how to spot red flags in investment opportunity pitches.

En español | I'm guessing I average a call a day from someone offering to let me in on an investment opportunity. And these aren't Nigerian prince-type scams either; they are, for the most part, legitimate investment opportunities with all the proper registrations.

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But legitimate investments are often pitched in inaccurate and tricky ways. They can include oil and gas partnerships, private real estate investments, certain insurance products, securities or other income-producing vehicles.

Here's a hypothetical example of such a call — and how I'd know for sure that what was being presented was false. The pitch goes like this:

Hi, this is Tex from down here in Odessa. Do you invest in high-yielding and safe energy investments? For a very limited time, Acme-Globex Oil is allowing a select few new investors into our partnership. Our track record includes never hitting a dry well and producing annualized income of 25 percent, and that income goes on for several decades. Because the price of oil is temporarily low, we can now drill for far less and are likely to do much better than that 25 percent income. Can I put you down for $100,000, or would you like me to see if I can get you more? I can't promise more, but I'll try.

Every time I hear one of these pitches, I confess that a part of my brain is sucked into the fantasy, albeit briefly. A $25,000 safe annual income stream that my wife and I could enjoy, and then pass on to our son, is wildly appealing to the emotional side of my brain. But the logical side isn't convinced and starts throwing up red flags. Luckily, whenever emotion and logic tussle in my decision-making, logic prevails — as it did in this example, when I didn't just suspect I was being told something inaccurate, I knew it.

Use the filter of skepticism

There is an old saying: "Anything that looks too good to be true probably is." The key word here is "probably," meaning that even though I don't know for sure, I have every right to be skeptical. So, here was my response to the stranger wanting to make me rich:

Wow, 25 percent income and Acme-Globex has never hit a dry well? I would think letting me in as a new investor would totally tick off your current investors. Wouldn't they be plowing back those handsome cash flows to make even more? Can you explain why Acme-Globex is paying people like you to make cold calls to sell me? [Click.]

The click was the stranger hanging up on me.

My advice

These strangers are very skilled in using emotions to separate you from your money. They stroke your ego with assurances that you are among the select few investors who are being let in on this opportunity. Then they stoke your fear and sense of urgency by warning that this low-risk, high-return opportunity is limited — and you've got to act fast or lose out. As a rule of thumb, the more stroking and stoking in the sales pitch, the less the likelihood that you're getting an accurate picture of the investment.

Set your emotions aside and ask yourself why, if an investment is so good, a firm would be paying great commissions for salespeople to cold-call consumers. Institutional investors could easily write a single check for hundreds of millions of dollars, which they would do in a minute if those attractive returns and the drilling record actually checked out.

Finally, don't ever think you are too sophisticated to fall for some of these pitches. I've seen some brilliant people take the bait. So, should Tex or some other stranger give you a call, my advice is to just hang up.

Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.