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Who Are the Smartest Guys in the Room?

The phrase “The Smartest Guys in the Room” is so well know that most people immediately think of Enron and the destruction of one of the so called richest companies in the US. Unfortunately their business practices lacked integrity, honesty and were highly fictional and meant to line their pockets rather than conduct legitimate business. The Bernie Madoff investment scheme was also riddled with fraud and fictional profits which led to eventual demise.  It is hard to know what is fictional and factual when the fraud is so pervasive that the financial reports of a business are part of the fraud. Investors can only base their decisions on information that a company provides to the investment community so when auditors turn a blind eye to the fraud it only allows the lie to continue until it eventually unravels, as it surely will, in time. Law enforcement has also failed to fully investigate reports of fraud and thus has failed their responsibilities as well.

The unfortunate reality is that obscene profits are being used as the justification for any type of illegal behavior and it is no easy task to sort out what is real and what is not when you choose your investments. It is a sad situation, but very real!

All it takes is company leadership who chooses to check their ethics at the door, if they have any. The bigger problem is that a few bad apples make all business leaders suspect and so this culture of fraud damages all businesses. There are many businesses that go to great lengths to operate legitimate, honest business and work hard to maintain their integrity. So how can you sort them out?

Investments in China have presented even more challenges as China has nationalized several companies and grabbed the investor’s money in the process. It is important to know the culture where you are investing and in China, traditional culture says that this type of activity is not dishonest; you have just done better business. Thus the inferior products, unsafe contaminants and predatory business practices are all ways of “doing better business”.

This complex situation makes the job of due diligence very hard indeed. You can’t just put your money in a promising company and wait for the returns to roll in. You need to know, in depth, the character of the people who are running the company, their values, have proof or at least a track record of their history and be able to trust the financial auditors. Law enforcement has egg on their face so there is good incentive for them to step up and fulfill their responsibilities. Only time will tell if this culture of fraud can be severely punished and stopped.

When you work hard for your money and rely on your investments to provide for future necessities of life for yourself and your family the risks of typical investments may outweigh the rewards. Many people have taken their money out of the stock market for this reason, which is tragic because many fine companies are having difficulty raising funds from investors and have turned to borrowing for the capital they need to build and grow the business.  Other legitimate businesses have taken the opportunity to buy back stock and thereby increase investor value. Many people have chosen to protect, at least some of their money by investing in gold, especially gold bullion.

When you purchase gold, the rule of due diligence still applies. Know what you are buying and if you are buying gold bullion coins pay only 5% to 20% over the spot price of gold.

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