Misleading investors is as old as investing, and in the internet age, it’s easier than ever to tout bad investments. All that’s needed to separate the unsophisticated from their money are the age-old enticements of greed, willing parties, a new shiny attraction, and sleepy regulators.
So, around 2020, financial professionals specializing in separating naïve investors from their money found new shady opportunities in Special Purpose Acquisition Company (SPACs) structures and crypto. But there are a few problems:
- SPACs take companies public in an expedited IPO path with minimal disclosure, fueled by fast money, top-tier investors who then need a crowd to offload their shares when the IPO glow effect wears off.
- Crypto should be considered the largest pump-and-dump investing scheme in history. Crypto is not an asset class and, for the most part, should be considered one of the largest pump-and-dump stock schemes in history. Crypto has no investment fundamentals (revenues, inventory, cash flows, return on assets, etc.) to examine. Price moves are based on mass hysteria.
So far, this is nothing new.
How To Fuel the SPAC Frenzy
The big attraction of SPACs was that the IPO companies were often tech-related, had a tremendous web-created superlative fable, and were accessible online to a mass audience of unsophisticated investors.
But the SPAC frenzy is also fueled by two new factors: online brokerage firms that cater to day traders and fast-money speculators, and unethical financial websites that made big money publicizing the SPAC offerings. These firms profited by steering unsophisticated investors directly to brokerage firms who willingly let them buy SPACS with no disclosures, caveats, or even explaining how SPACs works.
So far, in 2021, SPACs has attracted some $95 billion in investor money. In 2019, SPACs accounted for 19% of all IPOS. Predictably, despite the hype, “their market performance of SPACS through July 2021 has lagged, with median performance trailing the S&P 500 by 15 percentage points, per Reuters. 2021 has seen 359 SPAC filings (i.e., shell companies that have listed shares), garnering a combined $95 billion, far surpassing 2020’s 254 filings and $74 billion raised.,” according to Statistica.
And what about the naïve individuals who bought into the SPAC frenzy? Did they know they were making bad investments?
As expected, it was terrible news for the mob that followed the hype. “Reuters found that over 100 special-purpose acquisition companies, or SPACs, that announced mergers this year on average have gained under 2% from the price they traded at when they first listed on the stock exchange.”
But what makes this a perfect scam is that some online brokerage firms catering to day traders and others seeking fast money return worked with some financial websites to entice investors into an IPO environment designed to produce losses. These two parties abandoned any ethical responsibilities and made large profits from naive investors.
Unethical Sites Profit from Click-Bait Scams
Just as in any scam, there are winners and losers. We know that individual investors would have been better off in an S&P index fund or ETF, but those are not the sexy vehicles for wannabe online crypto millionaires.
Instead, the firms that benefitted were financial websites and the new online brokerage firms that offered commission-free trading, gamified platforms, and fast-money messages.
These unethical firms include Robin Hood and a host of other online brokerage firms that paid advertising fees to other unethical financial websites that created stories about the SPAC without posting any disclosures about the poor odds of making a profit. The online financial sites did nothing illegal, but they were very unethical when protecting naïve investors from making bad investments.
But being unethical is also very profitable. One editor at a smaller financial website told me the site was making $20,000 a month in ad revenue from churning out SPAC news as soon as it hit the EDGAR database. When I asked if the site ever posted disclosures about the lousy odds of making money, he hesitated and said they were working on it. To this day, the site has nothing posted to warn naïve traders.
The Rise of Bad Investments in SPACs and Crypto
As someone who has written about retirement since the 1970s, it’s evident that people planning for retirement fall into two categories: speculators and investors. The two are not compatible as retirement planning clients.
SPACs and crypto dominate the financial media, and neither beat an S&P index fund. Crypto pays no dividends and is well suited to serve as a medium to launder money and evade taxes. It has all the high-tech hype and no fundamental investment evaluation criteria. It belongs in a portfolio along with six months of dried food, gold coins, and bullets. It doesn’t need to meet a timeline of 20 years in retirement since the rapture will take care of the details.
But things change if you are an investor. Like the tortoise and the hare, investing is the dull tortoise who wins the race in the long term. Crypto, online gambling, and SPACs make for great conversations in a bar, but they could be worth less than their purchase price in a post-working life.
Sadly, the financial media has abandoned its role and responsibility to educate naïve investors. It’s a reason why Americans have some of the lowest scores of any nation when it comes to measuring financial and political literacy. So, it is no surprise when retirement accounts get decimated by credit card debt, large home equity loans, and bad investing decisions. Political illiteracy explains why Americans distrust the government and its processes and institutions. It’s no wonder that half of Americans think Judge Judy sits on the Supreme Court.
And if you think that’s funny, wait until we hear from the financial media about how crypto is replacing US Treasury bonds.