Ben Carlson: How Not to Get Scammed

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Our guest this week is Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management. A prolific and insightful writer, Carlson frequently publishes pieces on investing, personal finance, and other topics on his popular blog, A Wealth of Common Sense. In addition, he co-hosts the Animal Spirits podcast with his colleague Michael Batnick and is active on social media, including Twitter, where he can be found @awealthofcs. A CFA charterholder and graduate of Grand Valley State University, Carlson has authored several books, including A Wealth of Common Sense and Organizational Alpha. In today's episode, we'll be discussing Carlson's most recently published book, Don't Fall for It: A Short History of Financial Scams.

Background Ben Carlson bio

A Wealth of Common Sense blog

Animal Spirits podcast

Don't Fall for It: A Short History of Financial Scams, by Ben Carlson

Scams: Victims and Perpetrators Nigerian prince scam

Annals of Gullibility: Why We Get Duped and How to Avoid It, by Stephen Greenspan

The Wisdom of Psychopaths: What Saints, Spies, and Serial Killers Can Teach Us About Success, by Kevin Dutton

"Troubles at Atlanta Hedge Fund Snare Doctors, Football Players" by Ian McDonald and Valerie Bauerlein, The Wall Street Journal, March 9, 2006.

William J. Bernstein: "The wealthy are different than you and I: They have many more ways of having their wealth stripped away." The Four Pillars of Investing: Lessons for Building a Winning Portfolio, Chapter 7, Page 179.

"How Did Spike Lee Convince Michael Jordan to Help Fund His Malcolm X Film?" by Gene Marks, Entrepreneur, Feb. 28, 2019.

"Johnny Depp Spends $200,000 a Month on a Private Jet and $30,000 on Wine--Here's How Else He Blows His Fortune," by Emmie Martin, CNBC.com, Aug. 31, 2017.

Enough: True Measures of Money, Business, and Life, by John C. Bogle

"South Sea Bubble Short History," Harvard Business School

"Fraudster Poses as Jason Statham to Steal Victim's Money," by Andy Bell and Dan Box, BBC News, April 29, 2019.

"Lessons From the General," by Michael Batnick, The Irrelevant Investor, Dec. 12, 2017.

Transcript

Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, director of manager research for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar, Inc.

Ptak: Our guest this week is Ben Carlson. Ben is director of institutional asset management at Ritholtz Wealth Management. A prolific and insightful writer, Ben, frequently publishes pieces on investing, personal finance, and other topics on his popular blog, A Wealth of Common Sense. In addition, he co-hosts the Animal Spirits podcast with his colleague Michael Batnick, and is active on social media, including Twitter, where he can be found @awealthofcs. A CFA charterholder and graduate of Grand View State University, Ben has authored several books, including A Wealth of Common Sense and Organizational Alpha. In today's episode, we'll be discussing Ben's most recently published book called Don't Fall For It: A Short History of Financial Scams."

Ben, welcome to The Long View.

Ben Carlson: Hi. Thanks for having me.

Ptak: So, you're well known in the blogosphere and financial social media, but today's podcast probably introduces you to some of our listeners for the first time. So, can you briefly describe what you do for Ritholtz Wealth Management and how A Wealth of Common Sense, your blog, and other writing you do fit into that?

Carlson: Sure. First of all, I'm on the investment committee there. And my specialty throughout my career has been working in the nonprofit space. So, foundations, endowments, pension plans, that sort of thing. I've worked in a variety of capacities in that space and came to Ritholtz about four years ago to try to help some smaller nonprofits in that space, help manage their money and create good investment policies and that sort of thing. So, in my writing is really just selfishly for me to sort of get my thoughts out and organize them in a way but also helps with keeping in touch with our current clients to save our financial advisors some time so they don't have to constantly be answering questions from people, and potentially prospects as well, and kind of help them to get to know us, and what our thoughts are on the markets and investing in general and that sort of stuff. So, writing kind of is a two-pronged approach. I mean, I really like to just sort of get some ideas out there. And it's been really helpful for me to have some feedback from some people too, from readers and hear what other people think, because obviously, I don't have the market cornered on good ideas

Benz: So, do you work with clients in a hands-on way? I think people always look at how prolific you are, and others are at the firm. How do you balance the client interaction with the other work that you do?

Carlson: Right. We do have a handful of CFPs on staff who handle the majority of our clients and are sort of more behind the scenes than people like myself or Josh or Barry or Michael, who are more out there in terms of getting information out there and talking about the firm. But I do have a handful of clients that I work with, again, mostly in the nonprofit side and a few family office clients that I work with. But I kind of balance it out where I don't have a ton of clients because obviously that takes a lot of work. So, I do have a handful of clients and that's a smaller part of our business. But we do have advisors who handle most of the day-to-day interaction. And then, from time to time, we'll hop on the phone with clients and chat about the markets or what's going on and see what they're thinking.

Ptak: Then as far as the investment committee goes, is it fair to assume that a key deliverable for that investment committee is things like asset-class forecasts and maybe setting the mixes of diversified portfolios that clients that you serve would be putting to use as a part of their overall plan?

Carlson: Right. Yeah, it's our job to sort of monitor the client portfolios and look at the funds and strategies that we're using, set the right expectations and yeah, it is our job to communicate with clients and let them know what we're thinking. We don't make a ton of change to those portfolios because we are more long-term in thinking, but then it's also working hand in hand with our advisors to make sure that the clients have the right fit for their own portfolios, depending on their needs and their willingness and ability to take risks. So, it kind of goes hand in hand with a lot of the financial planning at the firm as well. So, we try to work hand in hand with the advisors on that stuff. But it's really setting policies, making sure everything is followed through, and then really monitoring the process and the performance and see how things are working.

Ptak: And when you're coming off of a really, really strong year like we had in 2019, I think there's a natural temptation to go through and maybe make some changes to one's forecast. And so, how have you as a committee approached that? I know this is something that you've written about, and I think some of your colleagues have as well. But how does that actually take shape in the conversations that you'd have as an investment committee?

Carlson: Much of the simple shorter-term stuff is just things like rebalancing back to target allocations. That's the sort of short-term stuff. But when we tell clients, when we make these longer-term asset-allocation shifts--and that's kind of the bigger move that we would ever make is just maybe a change in asset allocation--whether it's a change for the overall portfolios or whether it's just on an individual client basis, depending on their needs, we think that's where, those are the big levers that you can pull to really make meaningful changes. And we like to tell people we don't make those changes very often and when we do, we look to make them with a three, five, maybe seven-year time horizon in mind. And so, it's not something that we're going to change and then change our minds about in six months. So, those are the kinds of decisions that take a long, long time to think through. And we have a lot of discussion on the committee with those, and we get a lot of things in writing and do some back and forth. So, it's one of those things where it's a longer-term process, and we tell clients in advance, you know, we're setting these expectations up. And I think that's true in terms of when you have a big up year like this. And the same thing is true of when, at the end of 2018, when you had a downturn. So, I think it's really just making sure that you're always hitting on those expectations in terms of the range of results you can get.

And it's interesting, because most times during a big bull market, you'd think clients would be saying, you know, let's push that green button and go and push on the gas a little bit more. And the majority of the people these days, I think, are especially a little gun-shy from the last crisis and people are just worried when that shoe is going to drop again. And so, more people are worried, I think, that these gains are going to be fleeting than anything. And so, it's really about setting expectations in terms of both upside and downside in terms of, you know, we don't know where it's going to go. But the same worries people have today, they probably could have had five or six years ago and look at the gains we've had since then. So, I think it's really about setting those, sort of, range of potential outcomes depending on the portfolio.

Benz: So, is there an example of a change that you made to the long-term asset allocation that you could talk about to kind of highlight the process?

Carlson: Yeah. In recent years, we have made just a slight overallocation to international markets. And it's one of those things where we tell clients right away, you know, if this is the kind of move that works, don't call us geniuses. And if it doesn't work, don't call us idiots, because, again, it's something that we think over the next three, five, seven years can potentially work, because there are lower valuations and higher yields overseas in places like foreign-developed markets and emerging markets. But we're definitely not smart enough to figure out the correct time to make a huge push over there.

And definitely, it's one of the things where we don't like to think in terms of extremes. So, we're not going to make a huge shift completely out of one asset class and all into another one, because that's just not the way that a prudent, diversified portfolio works. But it's one of those things where around the edges where we might over-rebalance a little bit, but again, with the correct expectations in mind that this isn't something that we're banking on working in six months, it's a more of a multiyear process.

Ptak: In your blog, you cover a range of topics from demographics, to investing, personal finance, behavioral, you name it. So, turning to the book that you recently published, which is called Don't Fall For It: A Short History of Financial Scams, I'm wondering, were you drawn to the subject of that financial scams because they bring together many of the topics I just mentioned in such a vivid way?

Carlson: Definitely. And I think one of the reasons … I've been reading a lot--you know, you hear a lot of these stories in recent years, about Theranos with Elizabeth Holmes, and there's the Fyre Festival guy who scammed people out of their money for a vacation. And for whatever reasons, those are the kinds of stories that really stick with me lately as opposed to these big success stories and the home runs. Because I think there's a lot more that people can learn from watching the mistakes of others than they can really the successes of others. And as I was sort of pulling on the thread, doing some research from this stuff, I started out thinking, well, what is it that motivates these people to take advantage of others? And then, I pulled on the thread a little bit more and I realized, well, maybe I can look at this from the victim's perspective and why do we keep falling for the same stuff over and over again. For example, the Nigerian prince email scandal that people have probably been seeing ever since they got an AOL account in the late '90s. That actual fraud dates back in some books I found to like the 1400s, obviously, not using email back then. But some of these frauds have just been--it's almost the same ones over and over again, and people keep getting duped. And I just wanted to know, why does that happen and what is the behavioral psychology or human nature behind that and what is it inherently in us that makes that happen?

And then, I found a lot of similarities between a lot of these time frames where these frauds were happening. And I found some instances where there were periods of time where this stuff just happens more. And I found a lot of the stuff across history really just was similar in many ways. And so, yeah, a lot of stuff that I typically read about and some of the stories that I uncovered here, I thought really illustrated that well.

Benz: So, when you began researching the book, did you have preconceptions about the types of investors who were vulnerable to financial scams? And did your findings upend any of those preconceptions?

Carlson: Yes. I guess, I didn't really have any preconceived notions on that. I kind of went into it with an open mind. And what I came away with is, it really doesn't matter. There were people on the farms back in the early 1900s, who mortgaged their entire farm and lost it all and they really didn't have much to lose. On the other hand, you have these wealthy people who are constantly being taken advantage of probably because they have a big target on their back. And what I found was, most of the time, it's just for different reasons. But almost everyone's a target. It's just I think the wealthy are probably bigger targets because, frankly, there's more of an opportunity to take more money from them because they have so much wealth.

But I almost equate it to like an institutional versus an individual investor. And a lot of times, professional, big institutional investors will create mistakes in their portfolios because they think they know more than they do or they're overconfident in their abilities, where you have an individual who probably doesn't know quite as much, and goes into it with maybe a little more of a naive attitude. And I think that's the way to think about the wealthy versus people who aren't quite as well to get caught up in a lot of these scams. The wealthy just have some overconfidence sometimes.

One of the big things I found a lot of times, was I tried to really pin down, how much per year or how much over the last five years in financial scams that people lost, and none of the numbers really worked because they found that the majority of wealthy people who get caught up in this stuff, they don't want to report it because they're so embarrassed. And that's really one of the reasons that a lot of wealthy people fall for this stuff, too, is because they want to believe that they're smart enough to understand some of this stuff. And they figure, well, if these other wealthy people are putting money into it, they must know what they're doing. So, I'm going to just follow their lead without really doing a homework on this stuff. So, a lot of times, the more money you have, the harder it is to avoid this stuff. Because there's almost this keeping up with the Joneses aspect of financial fraud.

Ptak: You clearly state the book's goal at the outset, which is to help people make better financial decisions by learning from the mistakes of others and avoid getting taken advantage of. How does the book do that?

Carlson: This was one of those books where I tried to let the stories tell the lessons. So, I've written a couple books before this and this one was a little different because it was more research intensive. And the other books were more about my investment philosophy in terms of individual investors and institutional investors. Whereas this one I wanted it to be, I wanted the lessons to kind of just jump off the pages and punch you in the face, for the lack of a better phrase, because I think the stories really tell. Because you read some of these and you go, how can these people be so stupid? But every one of the stories is like that. And we want to believe that that won't happen to us. But people make dumb decisions with their money all the time. And that doesn't mean that every person reading this book or listening to this podcast is going to fall prey to financial scam, because that's probably not true. But that doesn't mean you're not going to make decisions with your money that can really shoot yourself in the foot.

So, I just wanted to kind of make it obvious for people--some of the huge mistakes people make. And I think if you can just really work on minimizing those, especially with investing you can't completely get rid of all the minor mistakes you can make. But I think if you can just avoid the really big ones instead of trying to go for the home runs, just try to avoid the strikeouts. I think that's half the battle.

Benz: You talked in the book about how wealth doesn't necessarily reduce one's susceptibility to these kinds of scams, nor does being financially educated. In fact, it might be the opposite. How about age? How does that factor into this? Are older adults more susceptible? Some of the anecdotes would certainly suggest that that's the case.

Carlson: Yes. And unfortunately, we have this huge cohort of baby boomers retiring. And they're the ones--again, they're the ones with the assets. So, they kind of have the target on their back. And I think--the stats say that there's, whatever, 10,000 baby boomers retiring every day--I think a lot of these people are going to be prime targets for this stuff, because there's just going to be so much opportunity to take advantage of them. And a lot of people, the financial education aspect of it … Again, I think, even if you have a little education, sometimes a little bit can be a bad thing. Because again, you develop this sense of overconfidence and assume that while it sounds too good to be true for other people, but probably not for me. And I think unfortunately, older people that have the money are just going to be looking for a solution, especially the number of people who really don't have enough assets to retire comfortably and keep their lifestyle the way that it is. I think they're going to be forced to take some more risks than would be prudent for most people. And I think when you let up on that risk-management idea, you can let some things in that you probably wouldn't have before or shouldn't have. And so, I think that's why there's just going to be wave of this stuff coming.

Ptak: What do you think that those investors can do to armor themselves, to protect themselves against being the victims of a fraud that's perpetrated?

Carlson: I mean, the simple stuff is just obviously doing your homework and having a good decision-making process in place. It sounds so simple and easy, but just knowing what you own and why you own it in terms of an investment. A lot of these scams that I came across really were just done in a complex nature and it was kind of this, just trust us, we got this, don't worry about it, kind of attitude. And I think those days should be over when we have the Internet that gives us more information. But, unfortunately, sometimes that's not the case because the Internet can be this big, just confirmation-bias machine. And sometimes people don't want to see the truth that's staring them right in the face. So, I think always having another set of eyes on it can help and sometimes even that doesn't help.

So, I give the story in here about this guy, Steven Greenspan, who was the victim of Bernie Madoff's $65 billion Ponzi scheme. And he talked about how he used the financial advisor to invest in one of the feeder funds. And he just put his entire faith into this advisor. And obviously, I work in the financial-services industry--I'm all for having a financial advisor. But I don't think that you can ever outsource your understanding of what's going on. And his whole thing was, he said, I kind of just trusted the financial advisor to make these decisions for me. And I had a friend who recommended him, so I just took them at face value and what they were saying. So, my line of thinking is, it's your money; no one is ever going to care about it as much as you are. So, even if you get outsourced advice from someone, you still have to understand what is going on in there and what's the decision-making process and what are they putting you in instead of just putting your full face into what they're doing. Because even when you outsource to an advisor, that doesn't mean that you can just put your feet up and relax and totally forget about it.

Ptak: So, the irony of your book's title is that we know people will fall for it. It never fails. And I think you've already alluded to some of the reasons for that. But maybe you can quickly sort of summarize why it is that for eons people have been falling for these tricks, these scams, as they have?

Carlson: Obviously, the biggest part is just the human nature thing, is that we're all sort of born this way. And a lot of the inherent biases that we're born with just make it hard to overcome this stuff. And I think one of the things that I came away from a lot of the stories that I researched was, I actually came away really impressed with a lot of these scam artists. And it's almost too bad that they use their talents for evil instead of good because a lot of them were just … It's almost a cult of personality where these people just have the ability to sell anyone anything at any time. And the way that they can spin stories and get people to do what they say is just really masterful in a lot of ways. And a lot of the stories, even the people who got scammed came away still kind of respecting these people, which was kind of crazy.

So, there was this John Brinkley guy that I talked about who was this "doctor" and I put that in quotes because he wasn't really a doctor. This was kind of before the standards were up to it and after his medical practice basically led to the death of upwards of almost 50 people. Someone was at his funeral and realized he was being bilked and the guy said in the crowd at his funeral, he said, I know he was bilking me, but I kind of still liked him anyway. And so, some of these people just have this aura about them, where they could do a lot of good and I think the sales thing and the ability to tell a story … And, you know, we're kind of these storytelling creatures where that's one of the good things that has sort of helped push our civilization forward: the ability to believe a story. That's why we have these huge cities and religions and corporations even where there's so much trust and faith in the system. But a lot of times that trust can work against us as well.

Benz: So, do you see a resemblance between some of the more notorious scam artists that you profiled in the book and the prototypical successful CEO or entrepreneur?

Carlson: Yeah, actually, one of the things that didn't make it into the book that I wanted to potentially spend some time on was, there's a book called "The Wisdom of Psychopaths," and they talk about how it's a fine line between someone who's a psychopath and ends up becoming a serial killer, and someone who has some of those same tendencies and becomes a CEO. And part of it is just having this total detachment of emotion, because obviously, some of the things that these people did, they took people's life savings, they really took advantage of a lot of people and made people's lives miserable, and they didn't really care about that in most instances. Unfortunately, some of those same traits can go toward successful people who have the ability to just look above the fray and not worry about who they step on on the way up, which is kind of unfortunate, but that's the way it is in a lot of cases, I think, in terms of the people who get to really high levels of success.

Ptak: One of the things that really struck me in the book was a passage where you referenced a study that found victims of financial fraud were actually better informed about investing than nonvictims. Can you talk about the significance of that finding? I think that you've referenced it at least once before in our conversation, but it's quite remarkable.

Carlson: Right. And that was one that was dealing with … I actually found that dealing with this guy named Keith Wright, who took some NFL players to task and he had this investment scheme. And it was one of these things where he was promising these huge returns. At the minimum, he was promising 20% to 25% returns. And in one of his accounts, he was promising 10% a month or something. And someone who did a big, huge story on this, tried to figure out, you know, why is it--and it wasn't just NFL players--who, well, you think, well, you know, they're young, they have all this money for the first time, they must be easy to take advantage of. And that was certainly true with a lot of athletes who didn't take care of their money. But the people who really funded Wright's investment strategy were these doctors and lawyers and dentists and business people who potentially should have known better. And they were the ones who had more of a financial background and education. And so, William Bernstein, he had a quote that I like--maybe he was on your show before. He says, you know, "The wealthy are different than you and I; they have more ways of having their wealth stripped away." And sometimes it is those people who have just a little bit of knowledge and know just enough to be harmful, I think, unfortunately, that's kind of tough. And it's one of those things where I talk about in the book, sometimes these people assume because they're intelligent, and they have success in one arena in life, that it should easily translate over to another in terms of the markets and investing. As we know, that's not always the case. And more times than not, those people end up outthinking themselves and doing much worse than they should.

Benz: What did you learn about human psychology that you didn't know before writing the book? And I'll just say one anecdote that I loved was the Michael Jordan/Magic Johnson anecdote about sort of the one-upmanship. But were there any sort of illuminating stories for you from the standpoint of understanding how we humans relate to one another?

Carlson: Yeah, that one was funny because it showed how competitive people were. The story was, Spike Lee was trying to raise money for his "Malcolm X" film. And he went to Michael Jordan last and said that--he gave a number, this is how much Magic Johnson gave, knowing Michael Jordan would want to one up him. And that is one of the themes that I came across, especially with wealthy people, is how easily it was for them to try to do exactly what their neighbor or their friend or their other wealthy person was doing. Because they wanted to pretend like they were in that same echelon. And I think that's hard to believe, when you have all this money, that you would be so easily duped and so many of these people were. But I also just found that it really didn't matter, time or place, what was sort of going on with a lot of these people. We just have this sort of lottery-ticket mentality where we kind of can tell through common sense when you see someone else get taken advantage of you say, "What is wrong with that person? Why would they think this or why would they ever do this?" But then, when it comes to us, we want to think, "Well, maybe this holy grail actually does exist just for me, and maybe this secret is available for me and I can kind of be the one who actually gets to take advantage of it." And we always want to believe that that's reserved for us when just in most cases, it's just not the case.

Ptak: Do you think it's fair to say that all the scams you cover share one thing in common, which is a desire to get rich quick?

Carlson: Yeah, take the shortcut, find the easy path. I think that's pretty true for most people. And unfortunately, that sort of takes place in a lot of our different areas of finance too in terms of delaying gratification. And that's kind of one of the themes that I wanted to touch on here in the book is that, again, it's not just for avoiding financial scams. Again, obviously, if that helps people avoid these kinds of things, that's a good thing. But there's just a lot of little ways that people can kind of take advantage of themselves in ways where they're not thinking through their financial decisions, they're not delaying gratification and taking care of their own finances. So, I have the one chapter at the end of the book where I talked about Johnny Depp's spending ways where he really blew through his money, and in a way he was committing financial fraud against himself because he made three quarters of a billion dollars and has basically nothing to show for it, because he didn't live below his means.

Benz: One hallmark of financial fraud is this appeal to investors' worst fears. So, in addition to sort of that lotto mentality, people also can be receptive to sales pitches that play on those fears. So, let's talk about how investors can protect themselves from that kind of appeal--the more negative, you know, fearful sort of sales pitch.

Carlson: Yeah. And that was, again, one of the interesting things I found about the Madoff scandal is many of the pitches that I came across were these huge returns. And that was obviously the original Ponzi scheme. He was just promising these enormous returns in a short amount of time. And a lot of these financial frauds were like that where they just were promising these gigantic returns and people just couldn't believe their eyes when they saw these, so they had to get in. But someone like Madoff, I think, played more to our sense of loss aversion, and that was wanting to have maybe more consistency in your returns. And so, I think he never had a down quarter. He maybe had like one or two down months in his entire made-up stream of returns. And I think this has been the case since--especially since the financial crisis as well--where people's fears have been played on more than anything. And I went through the whole book … In the book, I did a whole chapter on why people are drawn to this end-of-the-world phenomenon. And there was a lot of newsletters that I profiled in there because it seems like selling fear in that realm actually makes for more subscribers. When you look at the difference between some of their stock-picking records that I went through versus how much money these places are bringing in, it was kind of astounding. It didn't even matter really what their investment track records were as long as they spun a good story and people were scared enough to listen to some of their predictions.

Ptak: In one chapter, you advise people to avoid those who look at the world through the lens of certainty, especially about the future. But people also don't want to receive hedged wishy-washy advice. So, what do you think is the happy medium, especially based on the experience that you and your colleagues have had at Ritholtz advising clients?

Carlson: Yeah, it's tough because we tell people, listen, we have to--the only thing we have to go by is what's happened in the past. So, we have to have the past somehow inform our decisions, but we'd also have to use what we see in the present to sort of update what happened in the past. And then, we can't predict the future. But we can certainly update our priors as the actual present comes to be. So, we set some expectations in terms of spending and inflation and potential financial market returns. And instead of having those things be static, when we have our updates with our clients, we go through and we say, "OK, here's what the expectations were, here's what has actually happened and transpired. Things are maybe a little better, a little worse than we thought. Now, let's update our priors to take into account where we sit right now." So, I think it's really about where we are.

And the other thing is, we think one of the most important thing is really tying that financial plan and a comprehensive financial plan to your portfolio, because without understanding what your needs are and what your goals are and what your desires are with your money, it's impossible for us to offer legitimate investment or financial advice. So, we think tying those things together and really making sure people are still on the right track for their own goals helps to get rid of some of the minor ups and downs we see in the market over time. So, anytime we can frame it in terms of the clients' own goals and their own personal portfolio as opposed to what's going on in the markets, we think that's a win and that helps people sort of stay on track.

Benz: So, one protective mechanism against scams that you discuss in the book is figuring out your own level of enough and what's enough. Jack Bogle wrote a whole book on that topic. But explain what that means--helping people find enough and how people can determine their own level of enough in their lives, like, how to set that level.

Carlson: Yeah, it is tough because I think we all have these moving goalposts. When we're young and we maybe don't make very much money, I think everyone has a goal in their mind of, if I ever made this amount per year, I would just be perfect, I would be delighted. And then, potentially you get to that amount and you realize, well, maybe I'm not as happy as I thought I would be, so I have to go to this other amount. So, I think it's always tough because it's a moving, it can be a moving target at times. But Warren Buffett talks in here--his advice was, "Listen, don't try to get rich twice." So, let's say, you do sort of win the game and you get to a good place financially, that's the idea of not really breaking the bank and making the huge, enormous mistake. But I think in terms of finding enough, it's this sort of lifestyle creep. I think is the biggest problem for a lot of people--that we have a certain lifestyle and then we make more money, and then our expectations adjust, and they keep getting ratcheted higher until we're potentially never really happy. So, I think somehow balancing the sort of need and desire and motivation for getting better--whether it's your financial state in life or your career--in some way to find gratitude and satisfaction in what you have. And for a lot of people, I think that has more to do with things outside of money than things within their portfolio. And certainly, for me, since I have started a family and have three little ones at home, that has really changed my perspective on this stuff in terms of what's important. And I realized that time is more important than money in a lot of ways and figuring out how to have money help you with those other things than anything.

Ptak: To recognize something is too good to be true, you need to know what's good. So, how should an investor, wealthy or not, go about defining good? And maybe to take this out of the abstract, I guess, in the current environment--one sort of example of good that I can think of is sort of yields or income that's generated by a particular investment. And it seems like that's an area that's particularly rife for abuse and predation, right, as different scammers offer products that generate certain eye-popping yields. And so, it seems in a situation like that it's really, really important to have a clear definition of what too good to be true is. What's the progressions that you think that investors should go through and trying to ascertain that?

Carlson: I think that's one of the reasons that this stuff can happen so easily, especially during bull markets. I wrote in one of the chapters here that I think a bull market is one of the times where this stuff flourishes almost more than any other because you have these situations where expected returns are getting lower, and especially in this environment, interest rates are going lower. And so, people are pushed out on the risk spectrum to earn higher returns and take more risks than they probably are willing to or need to take. And so, in an environment like this, you almost have to have a good bogy for comparison purposes and just understanding what the current levels are. So, in a world where treasury yields are--what are they today, 1.8%, 1.9% for a 10-year treasury. That's kind of your bogy. So, if someone is promising you, you know, I'm going to give you 10% returns, and I'm going to protect your principle, and you're never going to see your money go down. Comparing it to a 1.9% bogy like that should give you pause and try to understand, OK, maybe they can do everything they're saying, but what sort of risks am I taking to do that and what is the catch here? And so, I think anytime you have to be able to really compare it to what's going on.

That was the case with Charles Ponzi back in the day when he did his Ponzi scheme. The interest rates at the time were paying 5% and he was promising 40% to 90% in a 60- to 90-day period. And the funny thing with his scam was he wasn't even putting his own money back into his scam that was supposedly delivering these eye-popping returns. He was putting his money into the 5% safe interest rate. And people didn't realize, you know, if this guy is really making 90% every 90 days, why wouldn't he put his own money in it? And it's one of these things where you see--obviously, no one is being promised 90% these days, or I hope not. But these are the type of environments where it's going to be harder for people to really rein themselves in when they think they need these returns because of a perceived shortfall for where their portfolio is or where they think they should be, or their lifestyle or whatever it is. So, that's one of the reasons that a bull market can make it so hard to avoid these kinds of things.

Benz: Would you say market bubbles are kind of a generalized kind of scam? Talking to you it's seeming like there's sort of a porous border between an out and out scam and people just doing stupid things with their money.

Carlson: Yeah, and I found that there were a lot of similarities there. Again, because a lot of these happened during bull markets, and it's almost like a lot of these things--and especially, a lot of bull markets start off with a good idea and a lot of innovation starts off with a good idea that just gets taken too far. And unfortunately, that's what happens a lot of times. I talk about the South Sea bubble, which after some of my research--I mean, there was dozens and dozens of books written on this before--and after my research, I think it's possible that that may be the biggest bubble I've ever come across. The Japanese property and stock market bubble from the 80s might be the close second.

But it started off as a pretty good idea in terms of what they were trying to do to take down the country's debt and help people become equity owners, and it just got taken too far. And they really--to try to keep up the facade when things went wrong and people took it too far and the prices got too high. Everyone just had their own self-interest to keep things going for as long as possible until it just couldn't go up anymore and there were no more buyers and they had to have a crash. So, I think a lot of these things--that the problem is, they start off in a good place, and they just get taken too far. And once everyone is in and everyone is seeing easy money, it's hard for people to collectively look around and say, maybe this isn't a good idea and how did we ever let things get this far? They want to just keep things going.

Ptak: Was there a scam you came across that, while very unfortunate for its victims, eventually conferred benefits to society that dwarfed whatever had been lost?

Carlson: By far, the biggest one that I came across that I … I hadn't really done much reading or heard about was the railway bubble in Britain in the 1800s. And it ended up being where there was one guy who controlled all these railway companies and he was cooking the books. And he was making promises of these huge dividend payouts to get people to invest in the projects. But what came about was this huge investment of infrastructure. And what happened was, they were having people invest in railway projects. It was not like the government was putting in this infrastructure. And they would invest in the projects and people would pay money up front and they would be promised a dividend, and they would take the money and then they build out more railroad tracks. And it turns out at the height of it, the investment was roughly half the GDP of Great Britain. And when all was said and done, all these people had all their money wiped out because there was just way too much of it and there was just an overbuild. And I think after the fact, Britain had by far the largest density of railroad tracks in the world. And it was like seven times the length of railroad tracks in Germany or France, which were the second ones behind it at that point.

And I just can't imagine an infrastructure build-out of that scale today that the public actually funds themselves. And so, the majority of the investors in that strategy, in that scam, were individuals, and a lot of them were people in the middle class actually. It was one of the first big investments that they had done together where the middle class actually came in, and they saw this big change in railway traffic and what it was going to do to the world, and everything that they thought came through, but those investments didn't work. But still, after all was said and done, Britain had this enormous set of railway tracks that made it easier for people to go to town to town and to ship things. And it was a huge benefit to the society, much like what happened when we had the build-out of the telecom and the fiber-optic cables in the '90s.

Benz: So, have you ever been scammed? Or do you personally know anyone who has been and what did you or they learn from the experience?

Carlson: Nothing big for me. I'm sure most of us have clicked on one of those malware things that comes on your computer and it says, send us $49.99 and we'll fix your computer for you. I had probably done one of those in my day; no huge scams. But I think any little things like that, when they come in email and they say, you know, check your account, please give us your bank account number. I've heard a lot of stories like that with people who've had just these little things happen to them and that sort of stuff. You'd think that it would be easier these days with all the information we have at our fingertips to avoid those things. But it also makes it easier for people to use the Internet to take advantage of people. So, I talked about the one in here, there was the Jason Statham, the action movie star. Some woman in Britain actually thought that he was messaging her on Facebook, that he had run out of money in between movies and needed her to send him six figures. And this woman sent this person who she supposedly thought was Jason Statham, her new Facebook friend, the guy from Fast and Furious. And all someone had to do was put his picture on the Internet and make up a fake Facebook name and someone sent him six figures. So, I think stuff on the Internet like that--I think you probably see a lot more of these little scams. And again, I think that's the kind of stuff that goes unreported in many ways, because people just get so embarrassed by it after the fact. That these are the kind of things that happen that people just try to sweep it under the rug and not tell anyone about it.

Ptak: One of the other things that you stated in the book is by studying things like poor decisions, gullibility, irrational behavior, and mental errors, you can help see those things in yourself. And so, when you've done that, are there things that you've seen in yourself, and are there any steps you've taken to ward against that?

Carlson: Certainly. I think, especially, when you're investing in the stock market, it's still really hard for me to get over some of these story stocks, where you hear just this fantastic story about a company. And I don't really do much in terms of trading stocks. I have a little fun account that I use that's a pretty tiny percentage of my portfolio. And I think that's kind of a good way to segment it out. If you're going to make some mistakes, do it in a small way, and just have a little bit of fun with it. So, I think that it's really hard to avoid a good story, especially when it's attached to a high-flying stock price that is going up. So, I think that's still something that I always find myself. It's one of those things where going into it you always say I shouldn't fall for this, but sometimes a good story--when it comes to a stock, especially when there's a very charismatic leader or innovator who started the company--I think that's always really tough to turn down.

Benz: One thing that I am really interested in is the fact that we don't get better at this. You'd think, you know, with some financial education, with the Madoff story being so high profile, that some of these scams would stop working. Is there a reason to believe that we've gotten any wiser to scams with information more freely available? Or is it same old, same old?

Carlson: I think it's probably same old, same old. And the other side of that, that I've heard from some people, is that that's almost the cost of doing business in this trillion-dollar global marketplace that we've set up. It really is built on trust and faith in a lot of ways. And if people ever lost faith in, you name it--the dollar or our global-trade system or just the value of the corporations that we sort of place on them--if that trust and faith was ever eroded, who knows what would happen? It's almost like because we have this inherent trust and faith-based system, that maybe a Bernie Madoff-like situation is something that's more of just a cost of doing business. That's kind of hard to tell the people who were involved in that scam, I guess. Although, surprisingly, most of them actually, at this point, have gotten most of their money back. So, I guess, there was a case we made for that where the good outweighs the bad in a lot of ways, unfortunately. But I think a lot of where it, kind of, goes wrong is when people put their trust and faith in these other people and scams that they just never should in their right mind in the first place.

Ptak: Do you think in a sense financial scams are a cost of doing business in a functioning capitalistic system, and in your research did you come across any systems where financial fraud had basically been stamped out, but there was a trade-off for doing so?

Carlson: That's a good way of looking at it. Like, you wonder how many financial scams there are in a place like North Korea. That's not something that I really came about. But I think that's probably just part and parcel of what we have to deal with. And again, it was the huge leap forward in innovation where you'd see the scams run rampant. So, we would have these periods, especially the one for me that really stood out was the 1920s, the roaring twenties. There was just so much that was going on then in terms of technological innovation. So, you had the automobile come on board, people were getting refrigerators, and dishwashers and washing machines and all these things. And really, the whole world was just changing, and people were just so optimistic about the future. And I just kept coming up with scam after scam after scam in the '20s. And so, it's like we had all this good stuff and innovation going on and people were just so optimistic about the future and what the potential changes could bring that they were more than willing to light their money on fire. And that's what happened to a lot of them. And I think that period also brought out a lot of people in the sort of scam artists and con artists world who maybe wouldn't have been, but the opportunity really presented itself. And so, yeah, I think it's one of these things where we have these leaps forward, but they're almost always accompanied by people who are going to take advantage of you.

Benz: How are you applying the learnings from researching and writing this book to Ritholtz's practice and how you advise clients? What are the big takeaways in terms of how you work with clients?

Carlson: For me, it's almost always about the behavioral aspect, because I think that's just the most important thing in almost all these things we do when it comes to money--whether that's your personal finances, how you manage your portfolio, how you deal with people in a face-to-face basis or on the phone when you're dealing with clients. I think the behavior is always going to be the key and that was kind of one of the reasons that I liked studying this topic so much is because it all really boiled down to behavior and understanding human beings and the inherent weaknesses that some of us have in certain areas of our life. And it could be the most successful person.

So, one of the ones that I covered in a chapter was Ulysses S. Grant, who was arguably the greatest war general in history, based on a few historians accounts, and maybe second to Lincoln, in terms of helping us get through the Civil War, came away one of the most decorated war heroes in history, with a two-term President after that, and by all accounts, one of the nicest, most decent human beings that there was. And even this successful guy who was potentially one of the biggest celebrities in the country at that point, was taken advantage of by a shady business partner who created this more or less Ponzi scheme, using his name to bilk soldiers out of their money. And so, I think understanding that even really successful people and even some of the best people there are--the nicest, greatest, most successful people can still be taken advantage of. I think just understanding that human element is always going to be important anytime you're dealing in a service capacity with different people and understanding their strengths and weaknesses and what really are their pain points and that sort of thing.

Ptak: I think you said with your first two books you were drawing on things you'd already learned at that point in your career more or less. With this book, it sounds like maybe there was more original research and analysis involved. So, a question: what was, what was the most surprising takeaway of that research and discovery process? I know you mentioned earlier that one of the things you were struck by was just how there were maybe, in a perverse way, some things to admire about the more enterprising scammers that you profile. But were there other things that you really took away from this process?

Carlson: In terms of the research process itself, it kind of struck me as how amazing it is just the process of going through books. And so, I would go through these old books from--I found a couple of books from the 1800s that I read; I found some books from the '50s and '60s. And you go through the notes and the bibliographies from some of these books, and it was just like pulling out a thread in terms of the research process: how many these other books that I could find, and I would find them, you know, these used old books on Amazon--to go through the stories and really get more out of some of these things and more anecdotes, and stories and figures. And it's just shocking to me, when you look at just the bibliography of almost any nonfiction book, how much research and work goes into those, and how many different offshoots you can go by just doing a little research within a book. And so, that was kind of a fun process for me--just discovering these old books and trying to find some perspective from those times instead of just reading historians for a lot of these things. And so, that was always kind of neat to read. In some of the descriptions you would read from the 1700, 1800s, early 1900s, and it sounds like you're listening to an account of someone buying cannabis stocks today or whatever it is. It was crazy to me how so much of that still translates in terms of how we think about markets in rising and falling prices.

Ptak: Well, Ben, this has been great. Thank you so much for your time and insights. Congratulations on publishing the new book entitled Don't Fall for It: A Short History of Financial Scams. And thank you so much for taking the time to join us on The Long View. We've really enjoyed having you as our guest.

Carlson: Much appreciated. Thanks for having me.

Benz: Thanks for being here, Ben.

Carlson: Bye-Bye. Thanks very much.

Ptak: Take care.

Benz: Bye.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcast.

Benz: You can follow us on Twitter @Christine_Benz.

Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)