Investing in the Things You Know, Staying Away from the Things You Don’t

I recently read about a cryptocurrency ponzi scheme. In total, this scheme managed to scam people out of $722 million. The scheme was simple – they promised investors massive returns if they just gave them their money. Here are a few details:

“The indictment describes the defendants’ use of the complex world of cryptocurrency to take advantage of unsuspecting investors,” U.S. Attorney Carpenito said. “What they allegedly did amounts to little more than a modern, high-tech Ponzi scheme that defrauded victims of hundreds of millions of dollars”


“Discussed with his conspirators that their target audience would be “dumb” investors, referred to them as “sheep,” and said he was “building this whole model on the backs of idiots.”

US Justice Department (link)

It’s likely that these scammers will see the gavel thrown down on them like an episode of Judge Judy. In the meantime, I can’t stop thinking about the people who willingly gave them their money, about $722 million. How? What? Why? Imagine for a second that three or four people approach you, “Yo man, so I’m starting this company called BitCoin Club and we’re just, like, like we’re going to make so much money mining Bitcoin with your money.”

Image result for take my money gif

I don’t know if this surprises you, but in the investing world, things like this happen all the time. It, sadly, does show the type of people who are attracted to the financial world. Ponzi schemes, con artists, pump & dumps, and fraud have found their way into the investing world since the age of markets first began many moons ago.

There’s no easy way to avoid it, either. Everyone wants your money, but few really deserve it. I always come back to the legendary Peter Lynch who championed the idea of investing in only the things you know. His style has always resonated with me because of its simplicity. Lynch was most interested in the companies who he could see, use, and work with in his day-to-day life.

I will let Lynch speak to you in his own words (you can watch his entire speech at the bottom of this post):

“The single most important thing to me in the stock market is to know what you own. I am amazed at how many people own stocks and they would not be able to tell you why they own it. They couldn’t say in a minute or less why they own it.

If you can’t explain it, I’m serious, if you can’t explain to a 10-year-old in two minutes or less why you own a stock, you shouldn’t own it. And that’s true I think of about 80% of people that own stocks.

I made money in Dunkin’ Donuts. I can understand it. When there were recessions, I wouldn’t have to worry about what was happening. I could go there, see people were still there, I did not have to worry about low-priced Korean imports or anything. And you laugh. I made 10 or 15 times my money in Dunkin’ Donuts. Those were the kind of stocks I could understand. If you don’t understand it, it doesn’t work. This is the single biggest principle. And it bothers me that people are not very careful with their money.

The public, when they buy a refrigerator they go to Consumer Reports. When they buy a microwave, they do that. They ask people what’s the best kind of car to buy. They do research. And when they go on a trip to Wyoming, they get a travel guide.

But people hear a tip on a bus on some stock, they’ll put half their life savings in it before sunset. And they wonder why they lose money in the stock market. And when they lose money, they blame it on the institutions and program trading. That is garbage. They didn’t do any research. They got a piece of junk. They never looked at a balance sheet and that’s what you get for it.”

Peter Lynch
Peter Lynch Speech, 1994, on investing and managing money

Lynch changed the way a lot of people think about investing. Myself included. But, I think it’s important to point out that I’m not saying Peter Lynch’s wisdom is a secret piece to success. Or a top 10 thing all geniuses do before waking up at 5 AM. No, I’m not saying any of that. There are no easy answers. What I’m more-so trying to say, is that generally, you probably want to remain extremely skeptical of the things you don’t understand or know. It may be smart to stick to the things you know, instead.

In an industry filled with people who want your money, you may benefit from added scrutiny, skepticism. Because, without it, well that’s how people get burned. They get burned when they underestimate their own ability to perform due diligence and overestimate their trust in something they know nothing about.