Heuristic Analysis of Business Opportunities.

There are hundreds of basic scams an investor could fall prey to and thousands of permutations on these simple schemes. Consequently, using general heuristics can best determine the legitimacy of any business venture.

1. Why me? Why have I been fortunately chosen and given this opportunity to become rich?

Credibility is higher from family members, medium/low from a friend, and exceedingly low to nil from strangers. Corollary 1: No one will break the law or risk jail time for the financial benefit of a stranger.
No scheme can make money for unlimited numbers of individuals sustainably as it will invariably approach equilibrium. Even companies like Wal-mart cannot sustain earnings 5-10% above the market rate, something that a simple graph could prove.

2. What is the real risk assessment? (Risk is always under-reported except perhaps in SEC disclosures) In making money risk and return play an equal role. No, really, an equal role. Since risk is often overlooked, if anything risk could play a greater role, so beware of presentations focusing 98% on the huge upside and ignoring the ‘negligible risks.’ IPOs for example have a much higher risk that a diversified portfolio of smaller stocks [and actually have significantly lower historical returns.] (Siegel, Future for Investors, p 90)

3. There are no secrets. With the internet and the proliferation of financial knowledge you should assume that others have access to whatever deals you have even ‘special access’ to. Our ego (and their calculated and stirring spiel) will often try to convince us otherwise. You’ll also find a strong correlation between ‘secretness’ and legality and legitimacy.

4. Concepts first! To avoid the ‘too close to the tree to see the forest’ mentality, examine the business opportunity purely in concepts ignoring the figures and specifics. “Ok, this stranger called me at work, mispronouncing my name, and offered me a deal to make exorbitant returns because multi-national Citibank needs bridge financing....riiiiight.” Even, “So the retail distribution model is changing and I’m going to be the first one to get in on the trend of selling shampoo from boxes in my garage...Uh huh..”

Trend Breakers. The concept of making money by being the first to get in on a trend or to invest in it is largely fallacious. (See Jeremy J. Siegel’s “The Future for Investors: Why the Tried and the True Triumph over the Bold and the New”)
Saturation. Most fast growing opportunities quickly hit saturation. Most people over-estimate the saturation point convinced that say 4 billion people will be using a revolutionary widget in the next decade.
Serendipity or Stupidity? Each $1 lottery ticket you buy has an average value of approximately $0.50. So if you buy all of them you would earn just half of your money back. Luck is therefore simply irrational hope—as irrational as believing in a random e-mail from a foreign dignitary asking your help to move millions from a defunct republic and offering you a generous cut (419 Nigerian Scam). Coincidence and chance should always arouse suspicion.

5. Time pressures and uniqueness are always exaggerated. This prevents one from doing proper investigation and due diligence. Opportunities, even wild opportunities, are pardon the cliché, like buses - another one will be by again soon. Trust me.

6. Two reliable opinions are worth ten free ones. Most people will try to get at least a few different opinions, but your barber does not have an MBA no matter how much he may talk to you about stocks. Also, Google has lots of information yet finding no evidence of a company’s fraud is not the same as proving its legitimacy.

Note: This is just a cursory examination of the factors one should consider in evaluating a business opportunity. Be sure to consult reliable sources and use common sense before deciding on any investment. -Martin