DON'T fall for promises of 'easy money'
DON'T fall for promises of 'easy money'
Chuck Crites, 39, a successful real estate entrepreneur in Corona, Calif., has no problem with what many regard as the cardinal rule of investing. "If you want a payoff," he says, "you have to take a risk."

So in 2002, when he heard about a company called MX Factors that promised a 12% return every 90 days, he followed up. A representative explained that the company provided short-term loans to government contractors. Crites knew of the projects MX claimed to be financing, which reassured him.

He felt even more assured when his initial $25,000 investment started earning fat returns. By 2003 he had raised his stake to $500,000, just before regulators exposed MX as a Ponzi scheme.

Crites and 550 others lost a total of $38 million.

Like many Ponzi operations, MX sought plausibility by tying its "business" to an industry that potential victims would likely regard as profitable - in its case, well-known local government projects. (Experts say the latest fashion in Ponzi schemes is to claim to be in natural gas or oil.)

This plays well with "sophisticated" investors who relish getting a piece of deals not available in ordinary markets. That, plus the ace card of every Ponzi scheme - the windfall payouts to early investors - hooked Crites. "I figured if you can lose in the stock market, which is regulated, why not take a chance on something that's actually paying out?" he says.

The lure of the big score is well known to Stanford University psychology professor Brian Knutson. His research has shown that the parts of the brain that anticipate reward are markedly more sensitive to the amount of potential gain than to the probability of earning it.

In other words, we're wired to ask, "How big?" not "How likely?"

HOW NOT TO BE A SUCKER Both questions, however, need to be asked of any serious investment. And if you don't understand the business behind the scheme, don't invest.

For all his investment savvy, Crites failed to press MX on the obvious questions: How could a business that lent to small businesses earn 12% compounded quarterly, or more than 57% a year? And if those returns were legit, why wasn't the field jammed with big lenders trying to undercut MX's prices?

Crites may be quite comfortable with the rule that you must take risk to earn rewards. But he failed to apply another rule - one that, if followed faithfully, will keep you out of any scamster's clutches.

Call it the second cardinal rule of investing: If it sounds too good to be true, it is.
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