Investment Scams Preying on Physicians

Investment scams are on the rise. Physicians who are overly trusting sometimes pay a high price. The White Coat Investor recently illustrated one real-life example

A physician-investor was deceived into investing in non-existent opportunities, resulting in significant financial loss. The scam involved sophisticated email and social media communications that appeared legitimate, targeting professionals with high education levels, such as physicians, who might not suspect fraud in what seems like a credible investment opportunity.

The scam is part of a broader trend where scammers exploit professional and personal email accounts to distribute fraudulent investment messages, leading to global fraud cases involving thousands of victims. These incidents underscore the importance of vigilance and skepticism towards unsolicited investment opportunities, especially those received via email.

Buying & Selling for Profit

The scam involved buying shares in small companies, selling them to group members at inflated prices, and then shorting the stock, causing its value to collapse. This left the investors with significant losses while the scammers profited. The involvement of multiple similar scams suggests a large, organized fraud operation. The brokerage’s delayed warning about the scam added to the losses, indicating a failure to alert investors to the risks of such schemes.

Pump and Dump

The report details a sophisticated “pump-and-dump” stock scam targeting physicians through WhatsApp groups. The scam began with an invitation to a group supposedly offering investment advice for physicians. The group was led by individuals claiming extensive stock market experience and affiliations with hedge funds and brokerage firms. Participants were encouraged to invest in specific US and Hong Kong stocks, with promises of high returns and risk management strategies.

“If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”
― Warren Buffett

Encouraging Returns

Initially, the physician-investor saw positive returns on small investments, which built trust and confidence in the group’s advice. As the scheme progressed, participants were segmented into groups based on their investment capacity, with the physician being persuaded to invest $60,000. A specific Hong Kong stock was recommended with assurances of significant returns and a stop-loss strategy to protect the principal investment. However, when the stock was purchased, its value plummeted, resulting in substantial losses for the physician and others in the group. Attempts to contact the group’s leaders for recourse were unsuccessful, revealing the operation as a scam.

“The first principle is that you must not fool yourself and you are the easiest person to fool.” – Richard Feynman

Not an Isolated Event

The physician-investor was able to contact two people in the same investment group. One had lost $15,000 and other lost $120,000. Both stated their stop loss executed at 0.49 Hong Kong dollars.

The physician-investor also searched Reddit and discovered other investors had lost $400,000 in a similar scam.

Other investment scams targeting physicians resulted in a total loss of $33 million, affecting 150 investors, including dozens of physicians. This scam is part of a broader pattern of fraudulent schemes that exploit professional investors, such as physicians, by inviting them to invest in seemingly lucrative opportunities. The losses reported by individual physician investors vary, with some investing nominal amounts ranging from $500 to $1500, while others have faced significant financial losses. The scale of these scams underscores the critical need for vigilance and due diligence when considering investment opportunities.

Lessons to Learn

  • Stock scams are increasingly prevalent and often sophisticated.
  • This physician lost $60,000, and others lost $135,000. That’s 135,000 + 60,000 or a $195,000 loss with just three investors. Those hard-earned dollars will never be recovered.
  • Be wary of any “exclusive deal.”
  • Don’t invest when the costs are unknown.
  • Concentrated single-stock investing involves unsystematic risk. You will not be compensated for taking that extra risk.
  • A broad-market index like the S&P 500 will not go to zero, but an individual stock certainly can.
  • Never expect high returns without high risk. Run if that is offered to you.
  • Don’t invest when the risks are unclear.
  • People don’t know what the future holds. Avoid those who say they know.
  • Be wary when “95% success” is reported.
  • 20 years of investing experience is no assurance of great success. More extended periods of investing do not necessarily mean superior results.
  • All of us can be fooled. Don’t laugh at this physician. You could easily be next.
  • Keep losses to a minimum by diversifying.
  • Be wary when no benchmark comparison for the investment (such as the S&P 500) can be made.
  • Without a benchmark and volatility data, you have no way of assessing or comparing risk versus return, such as a Sharpe ratio.
  • Beware of special allowances “to let you invest.” Bernie Madoff used this tactic effectively.
  • Overseas investing comes with different cultures, accounting systems, business models, currency, costs, and unknown risks.
  • Stop-loss orders don’t always prevent losses. This tool was promoted to reduce losses without reducing gains. If it seems too good to be true, it may be.
  • Many physicians are too trusting.
  • Many physicians are overconfident in their areas of knowledge.
  • Stop losses are a somewhat sophisticated tool. Most physicians do not fully understand trading mechanisms and how orders are executed at brokerage houses.
  • A written investor policy statement (IPS) would prevent most speculative investments and help you avoid scams.
  • Understand what you invest in.
  • Understand the value of free advice.
  • Read the excellent book What I learned losing $1 million.
  • “He shorted, and we bought.” Always consider who is on the other side of the transaction. Do you know more than they do? Do you know more than the market? Unlikely!
  • Greed is at odds with the goal of capital preservation. Avoid getting rich quickly. Slow and steady wins the race.
  • Beware of this Hong Kong stock pump and dump scam. It was so effective that it will be used again.
  • Read Cialdini’s Influence. The scammers used many of his principles to unload these stocks on unsuspecting buyers.
  • Be aware that scammers use WhatsApp groups to lure in fraud victims.
  • Don’t blame your broker. Their job is to execute your trade. They are not paternal protection for you.
  • “He made all of us invest in the stock.” Where was your free will and skeptical mind at that time? Did he force you?

We can be our own worst enemy. Be careful out there. Beware of the saboteur in the mirror.

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