Sam Bankman-Fried’s Imprisonment: A Warning for Naive Indian Investors
Last week, a US court sentenced former crypto star Sam Bankman-Fried or SBF, to 25 years in prison. For those unfamiliar, SBF is a 32-year-old MIT graduate. His parents are Stanford law professors. He founded FTX, a cryptocurrency exchange, once valued at a staggering $32 billion. As recently as 2022, SBF ranked 42nd on the US Forbes 400 richest list. SBF’s conviction stemmed from his fraudulent use of customer funds deposited on the FTX exchange to speculate in the crypto markets. The SBF story is worthy of a movie or web series, it serves as yet another cautionary tale from the world of finance.
Financial Dangers and Dodgy Advice
Getting rich quickly is undeniably appealing, and the world of finance is filled with unscrupulous actors waiting to exploit that. SBF did it on a massive scale. However, multiple smaller scams are happening in the world of Indian finance as well. As per-capita incomes and awareness about markets rises, Indians are flocking to the stock market at an unprecedented rate. According to exchange data, the number of individual trading accounts registered in India more than tripled from 2019 to 2023, surging from 41 million to 140 million.
This massive audience has given birth to a new breed of social media personalities: financial influencers, or “finfluencers”. These finfluencers claim to provide financial education and literacy, which is a positive development. However, many also dispense stock tips, trading ideas, speculative day trading strategies, and other frequently dubious financial advice. While some may be legitimate, it’s important to be cautious. Many, perhaps even most, exploit naive viewers to separate them from their money as quickly as possible. They entice viewers with the possibility of doubling their money in weeks or months through day trading, crypto, or penny stocks. Their videos are filled with technical charts and stock price tables. They also post screenshots of their supposed trading profits, often depicting significant gains within a few months. This is invariably followed by a sales pitch for a course or coaching designed to get you to invest in them. However, most of their advice is unsound, risky, and strongly discouraged. Many of the screenshots are fabricated or selectively presented, showcasing profits from a single day while concealing losses incurred on other days. To add allure to their social media feeds, these finfluencers often flaunt their supposedly affluent lifestyles and spending habits. They might say something like, “I bought a Mercedes SUV with all these penny stocks I traded. Want the same car? Here’s a link to purchase my Rs 5,000 penny stock trading course. Or, here’s a Rs 10,000 day trading course on. Or, better yet, send me all your money and..” You get the idea.
The Need for Stronger Regulation
This may seem like a minor issue, but these channels and videos garner tens of millions of views. Even if a small percentage falls for them, lakhs of people could be scammed and suffer financial losses. We wouldn’t allow someone who isn’t a doctor to treat sick patients. Legal advice requires being a lawyer. Only chartered accountants can audit accounts. However, in the wild west of social media influencers, anyone with a camera and an inflated ego can dispense their “expert” investment tips promising 50% returns in three months.
The problem has become so severe that even the stock market regulator, SEBI, has been forced to intervene. In a limited number of cases, fines have been imposed. Some regulations have been implemented regarding registration as a financial advisor. However, we need to to do more in terms of clear guidelines and enforcement.
Good Financial Advice vs. Bad
The problem with good, solid financial advice is that it is boring. It isn’t sexy or exciting. After all, the financial industry and money itself aren’t inherently thrilling. It’s what you achieve with the money you earn that makes life fun.
Here’s what constitutes good (but boring) financial advice: Invest in reputable companies or a portfolio of such companies, and hold onto them for the long term. The best advice? Be patient and hold. In other words, shut up and wait.
When we buy stocks, we’re acquiring a small ownership stake in a business. If you started your own business, you wouldn’t buy and sell it every month, would you? You’d run it for years. Similarly, you buy good, solid businesses and hold onto those stocks for a long time, often decades.
The stock market will fluctuate over the long term (and it might scare you when it goes down). But you just hold on and wait. If you can do this, you’ll get moderately better returns than fixed deposits. Now, “moderately” doesn’t sound exciting, but moderately better returns over a long period can make you quite wealthy.
The best way to make money from the stock market is to consistently invest in it for decades to come. Over time, you’ll become rich (and old, but that’s another story).
Don’t Fall for Get-Rich-Quick Schemes
It’s highly unlikely that you (or your favorite charismatic and funny influencer) will stumble upon a hidden stock gem that the entire market has ignored. They’re not secretly sharing this golden opportunity on YouTube so everyone watching can double their money in six months. No way. Stop hoping for this. It’s like those get six-pack-abs in seven minutes videos – they sound good, they get clicks, but they’re not true.
Invest in good companies, or if you want a more idiot proof approach, consider exchange-traded funds (ETFs). These funds mirror an index (like the Nifty) and often outperform most mutual funds over time. This is because 1) ETFs have much lower management fees because they simply mirror the index and 2) Mutual funds are run by humans who aren’t smarter than the market. When even most experienced fund managers can’t beat the market, do you think your social media influencer friend with the rented Ferrari knows better?
Money is a wonderful tool. It helps solve life’s problems and provides comfort, security, freedom, and status. No wonder almost everyone pursues it. However, this pursuit can make us susceptible to being exploited by those who claim they can make you rich quickly. Remember, investing is a slow, unexciting game. Stay the course, and hopefully, you’ll end up wealthy in the long run.