I get asked all the time about my very “favorite” Stupid Investments of the Week, the ones I consider the best in the nearly 10 years I have written this column.
There are too many to mention — which is why the column has been so much fun to write — but here are seven that come up a lot in conversation and always make me smile:
1. Unsecured subordinated investment notes from American Business Financial Services, which ultimately stopped paying interest and defaulted. Published March 21, 2003
American Business Financial Services sells “investment notes” with yields more than double the average certificate of deposit for the same duration. Sold in minimum amounts of $1,000 and in terms ranging from one to 10 years, ABFS’ investment notes — available in 44 states — look in advertisements like an alternative to low-yielding CDs and money-market accounts.
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The attraction is obvious. At a time when interest rates have reached 40-year-lows, there aren’t many investments promising a 5.5 percent rate for tying up cash for 12 to 17 months, or an 8.5 percent rate for locking your money in for three to four years.
Those numbers look terrific on paper, until you turn the page from ABFS’ “rate supplement” to its prospectus.
The firm loans money to “credit-impaired borrowers,” so you can start with the supposition that your cash is hardly going to fund anything that remotely resembles “investment-grade debt.”
That becomes much more clear when you review page after page of risk factors:
The only way you get paid in full when these notes mature is if ABFS remains sufficiently profitable to do so. By its own admission, the company has “historically experienced negative cash flows from our operations and expects to do so in the future.” Ouch.
There’s no reserve pool or “sinking fund” to pay off the notes; any legal or regulatory action against the company could cut into profitability and reduce the ability to pay the debt. And if the company goes belly-up, the money goes to senior debt holders before it goes to the buyers of subordinated notes.
2. Luvoo.com , because it started with a seductive (for me, anyway) phone call from Carmen Electra. Published June 23, 2006
Luvoo.com is a dating website that says it combines modern matchmaking methods — science and statistics — with old-fashioned face-to-face meetings to determine compatibility. But the site’s current focus seems to be on its stock; the most prominent feature is a bad head shot of Electra over the words “Newly Publicly Traded!”
Luvoo trades on Pink Sheets, a centralized quotation service that collects and distributes market-maker prices for securities traded in the over-the-counter market.
While there are many fine companies that trade on pinks — and plenty of investors who profit from trading in these issues — they are not the domain for average investors.
Many firms on Pink Sheets do not file regulatory paperwork with the Securities and Exchange Commission, and Luvoo is so new that investors won’t find any meaningful numbers; there is no balance sheet to analyze.
In the case of Teach Me to Trade, the seminars are a lot cheaper than some of the software programs and other goods being peddled to turn ordinary folks into market-timing geniuses. But there’s a good chance the seminars spend a fair amount of time pitching something other than those monthly data feeds.
In the case of Rich Dad Academy real-estate training, which focused on making money on foreclosures, everyone who bought the training has the potential to be the next success story, but most won’t be. The advice — however flawed some people find it — has worked for at least a small-but-dedicated group of followers.
But that success story is not likely to be the “average” attendee, but rather the exceptional one, the person who dives in with a passion and single-mindedness that stand out from the crowd.
4. XanGo Juice distributorships, because it was the last thing anyone expected to be pitched when they followed radio ads to a site promising to help them earn a lot of money. Published Aug. 30, 2007
XanGo Juice is one of countless health products sold through what supporters call “direct marketing” but what critics label “multilevel marketing.” No matter what you call it, it’s quickly clear that you’re swallowing more than just juice if you expect this to lead to a successful home-based business.
5. AfterThoughts “birthday insurance” Published Oct. 12, 2007
There’s nothing like deconstructing a bad insurance policy — like most of the ones you see advertised on television or in mass-marketing campaigns — but AfterThoughts “birthday insurance” was the most unforgettable.
“Birthday insurance” is life insurance that sends your grandchildren a birthday card and a check for the rest of their lives, potentially for decades after you are gone.
Strip away the sentiment, and you are left with a whole-life insurance policy that has an illiquid death benefit that pays out a small interest amount annually to beneficiaries.
6. MasterDex 5 Annuity from Allianz Life Insurance of North America, an investment that sounds good until you get past the simple sales pitch into some devilish details. equity-indexed annuities. Published Oct. 7, 2005
7. The Gerber Grow-Up Plan and its sister investments are among the things I get asked about most often. The Grow-Up Plan sounds like a good idea; in reality, it doesn’t offer the child much protection at all, which is why most people will find it a waste of time and money. Published March 4, 2011
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at P.O. Box 70, Cohasset, MA 02025-0070.
Copyright, 2012, MarketWatch