My jaw dropped.
I couldn’t believe what I was reading.
Surely, he can’t be serious.
Let me set the scene.
Over a decade ago, I had a colleague who was my regular lunch buddy at my previous job.
Given my interest in stocks, the discussion invariably drifted towards investing.
My colleague knew what he wanted.
Again and again, he stressed the importance of capital protection, while accepting that it comes with lower returns.
He was adamant on this point.
No problem with that, of course.
So long as you know what you want and know what to expect, you are on the right track.
Then came the surprise.
Out of the blue, he started messaging me about binary options from a dodgy-looking platform.
For the uninitiated, binary options are all-or-nothing bets on whether a price will end above or below a set level at a set time. Get it right, and you collect a fixed payout. Get it wrong, and you lose your entire stake.
The contrast between his capital protection stance and binary options was jarring.
It was befuddling.
How did this conservative investor, who had repeated the same adamant message for 18 months, suddenly decide to try a risky all-or-nothing approach?
So, I told him: Don’t walk away. Instead, RUN away.
Thankfully, he listened.
Sure enough, within months, the dodgy platform was exposed as a scam.
The fall of the rational mind
What bugged me the most was how a rational colleague, who knew what he wanted and knew what to expect, could fall for such a scheme.
Some of us may think that only fools fall for a scam.
But here we have a rational person, who is well educated and well grounded, succumbing to fraud.
What happened?
From what I observe, it’s the promise of huge returns that often breaks the rational mind.
Here’s the thing: my colleague did not stop being rational overnight.
His goals had not changed.
What changed was the number dangled in front of him.
When you have made peace with modest returns, the promise of huge gains can make your sensible plan feel painfully slow.
And once that number takes hold, it starts doing the thinking for you.
The questions you would normally ask — who runs this platform, and where do the returns come from? — quietly fall away.
None of us are immune.
What’s possible, and what’s not
That’s why the recent Nanning scam brought this lunchtime story flooding back.
In early September, the Ministry of Foreign Affairs said 52 Singaporeans had been arrested and detained in Guangxi, China, over suspected pyramid scheme activities.
Reports have linked the case to a scheme that asks for an entry fee of 69,800 yuan, or around S$13,000.
The promise?
A payout of up to 10.4 million yuan — almost S$2 million — if you manage to recruit others.
That’s about 150 times your money.
This promise alone should set alarm bells off.
Now, compare that with what’s possible.
Warren Buffett, arguably the greatest investor of our time, compounded Berkshire Hathaway‘s (NYSE: BRK.B) share price at 19.7% a year from 1965 to 2025.
Over the same 61 years, the S&P 500 (INDEXSP: .INX) returned 10.5% a year, including dividends.
Even at Buffett’s pace, turning S$13,000 into almost S$2 million would take around 28 years.
At the S&P 500’s pace, you’d need about 50 years.
So, when someone promises 150 times your money, ask yourself: is this person better than Buffett?
If the answer is no, the money has to come from somewhere else.
In a pyramid scheme, that somewhere else is the next person who signs up.
That’s the hallmark of fraud.
Get Smart: Let your goals be your alarm
So, how do you spot a scam?
Start with what my colleague got right in the first place.
He knew what he wanted. He knew what to expect.
That is your best defence.
When an offer promises returns that are wildly out of line with what you expect, don’t treat it as an opportunity.
Treat it as an alarm bell.
And when an offer asks you to abandon the very goals you have held on to for so long, that’s your cue to do what I told my colleague.
Don’t walk away.
RUN.
If you’d rather build wealth the steady way — by owning good businesses and giving them the time to grow — that’s what we do every day at The Smart Investor.
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Disclosure: Chin Hui Leong owns shares of Berkshire Hathaway.
