Even Buffett was scammed!

I don’t know if anyone has paid attention to this news. Probably not many but it’s worth your attention (info from other sources):

Founded in 2008, DC Solar touted its ability to provide “very favorable tax consequences” to investors, which turned out to be a lie. The company filed for bankruptcy in February after the FBI and IRS raided its headquarter in Benicia, Calif., in December of last year.

The FBI alleged that the company had been using money from new investors to pay old investors who had leases for the company’s solar-generation equipment.

Authorities determined that DC Solar had sponsored fraudulent funds that totaled $810 million. Other victims included insurer Progressive, which recorded a $156 million loss in the first quarter, and Southern Californian bank East West Bancorp., which took a $7 million hit in Q1.

As we all know, fraudulent schemes are not rare these days and it becomes even more critical nowadays given the relaxation of regulations that allow for more funding raising via crowd funding or private financing. The largest Ponzi scheme in the human history is definitely the Madoff’s Ponzi scheme uncovered 10 years ago. Billions of dollars have been lost for investors due to Madoff’s decades long Ponzi investment fantasy with a promise of high returns but low or no risks. You probably think after the Madoff’s well-known and widely reported Ponzi scheme, people have learned the lesson and won’t fall into such Ponzi schemes again. You are deadly wrong, if you think so. Just a quick search has shown me some new Ponzi schemes reported. For the one cited above, believe or not, even investors as smart as Buffett has been fooled and scammed. See the report here.

So virtually it is impossible for general people like you and me to be able to tease out all the weeds from the greens, especially for those via private financing or crowd funding. But at least we can follow a few principles to minimize the risk. Here are the top 3 that I personally follow:

• Too good to be true is usually correct and should be avoided.
• It is generally universally correct that high return is associated with high risk. If someone is promoting to you something with high returns but no or very low risks, cast your doubt first.
• Always assume you will never see your money back at the very beginning for investing in something, then determine what impact you may see if indeed all your money is lost. This is also true and useful for me in trading stocks. That’s why I almost always use options for trading purposes as I can predefine already at the outset what is the max risk I will take for each trade. This is how I manage my downside risk and how I can sleep well at night regardless how volatile the market may be.