Money, Feb 05

DEBT IS A FOUR LETTER WORD
Had your email inbox fill up with Nigerian scams lately?
Well, now there’s a new scam doing the rounds called ‘watch this stock’…
Jim rang his financial adviser to place an order for some shares. He had just received an amazing tip. He had run into his old friend Neville down at the club and found out that he had been making a lot of money on the stock market. This came as a surprise to Jim as he had known Neville for many years and had come to learn that Neville could not be described as the sharpest knife in the drawer. He was one of nature’s plodders, a real battler who never seemed to attract good luck. Well, it seemed that good fortune recently took a liking
to Neville.
It started about seven months ago. He received a personalised letter marked private and confidential. The letter introduced a fail safe system of selecting individual shares that were due to increase in value. It did not ask for money, only privacy. The letter was unsigned and Neville had no idea who sent it. It suggested that Neville watch the share price of ABC Ltd as it was about to go up. On the first of the following month a similar letter arrived, again unsigned, suggesting that the share price of DEF Ltd was about to decrease in value. Now Neville was not a fan of the share market, however he did note the prices of the shares highlighted and sure enough ABC Ltd went up in price and DEF Ltd went down. At the start of the next month he received another letter suggesting that GHI Ltd was due to increase in value. Well this had gone on for eight months and each time the information was correct. The anonymous share tipster had grabbed Neville’s attention and by the end of the fourth month Neville had opened an account at the local broker.
Neville’s problem was that he could never keep a secret and was happy to share his good fortune with anybody prepared to listen. Jim thought that it would be a crime not act on such a sure fire tip and promptly phoned his investment adviser to place an order. He also shared his enthusiasm and source of the information. If someone could get eight tips in a row correct, surely they must have some insider knowledge or superior skill. Jim was tempted to find out more about this mysterious tipster and was seriously thinking about changing permanently to this new adviser.

Jim thought that it was too good to be true and listened patiently while his adviser explained the scam. The scammer would source large mailing lists of like-minded individuals, preferably greater than 20,000 which was typically an industry trade list. The first letter is simply one of introduction, in the second he splits the list in half.
He tells one half that ABC Ltd’s share price is going to go up, the other that it is going to go down. The next month he would only write to the half which received the correct information. He would select a different share and advise half of the (reduced) data base that the share would increase in price, the other half that it would decrease.
Typically by the eighth letter he offers to sell them a share trading system for a grossly inflated price and then leaves the area before they discover that it is a scam. Neville’s only luck was in being part of the surviving group. A cynical person would suggest that Neville’s bad luck streak was continuing as he was likely to pay the $35,000 asking price for the useless software and become the victim yet again.
Jim’s adviser always says that punters should always be wary of schemes that appear too good to be true and be especially alert if secrecy is actively encouraged. He went on to explain to Jim that although scams were important, he should be aware that larger issues were requiring attention. He suggested that personal debt levels for New Zealanders could be the next warning sign that investors need to take heed of.
A study undertaken by the Ministry of Social Development in 2004 titled “When Debt Becomes a Problem” suggests that one in six New Zealand households have negative net worth. It goes on to suggest that 17% of the population believed they could not obtain $1,500 in an emergency (51% for those on income-tested benefits) and 36% could not obtain $5,000 (76% for beneficiaries). This includes sourcing it from credit cards and extended family. The study indicates that the above figures are about average for the rest of the western world.
If one in six households are experiencing trouble meeting their debt obligations, then punters have to question if the recent increase in house prices is sustainable. The average income for most New Zealanders is still between $40 and $50 thousand per year. Where the average debt level for an Aucklander is in excess of $73,000. In the USA the figures are similar. In Denver, Colorado mortgage foreclosures are up 30% on the previous year. Experts indicate that risky loan strategies such as no-money-down loans and a year of low housing appreciation contributed to the rise.
Parents have an obligation to teach their children that the first step to financial security and independence is to spend less than they earn. It is common for the financially unskilled to cross this line during the festive season at Christmas. Recent reports from the USA show that January is peak season for those registering with financial counsellors. Courses supported by churches have attracted unprecedented demand.
Those in debt have turned to religion for support. In New Zealand, Citizens Advice Bureau is filling that gap. They cover a wide range of legal, personal, housing and vehicle topics, however they are more commonly known for their budgeting skills.
When it came to selecting share market winners, Jim wanted to believe that some one else had an inside edge and was disappointed to hear that Neville’s secret adviser was just another scam artist. For Jim and his faithful companion Moira, the figures about those in financial hardship came as a surprise. They had learnt sound financial practices from their parents and were excellent students. They did everything within their power to pass these skills onto their children. They were unaware that almost 20% of the population were close to, or suffering, financial hardship. People should be in a position of telling their money where to go, rather than spend time wondering where it got to.