Falling into scam traps is not your fault

Sometimes we are overly harsh on ourselves for making rational decisions

Rubbing salt to my wounds

Among my parents, my dad is the bad cop while my mom is the good cop. I am also the clumsiest child out of my 3 siblings. Spilling food and drinks, forgetting passports and wallets, missing keys and sim cards, you name it; I’ve done them all.

But there was 1 episode I will never forget. You know of those Sunday mornings as a child, when you are still sleeping and forced to wake up, and your parents want to bring you to some bakmi place. When all you want to do is sleep in, wake up to Indomie with eggs, and start playing play station with your brother.

So on one fine Sunday morning, I was waken up forcefully and sulked on my way to some ugly bakmi ruko in some inconspicuous “gang” (small road) in some far away neighborhood. Indomie would be much simpler, much faster, much tastier wouldn’t it?

Anyway, my dad found a parking spot and we are ready to get down the car. Still sulking, I open the door of the car and suddenly…

“BAM!!!!” A motorcycle crashed against the car door.

Luckily, no one was injured. I was fine. The motorcyclist was fine. The motorcycle itself was fine too. Except the car door. It was folded out, at 135 degree angle.

My entire body was shaking with fear. What have I done?!

I know I have made a grave mistake of not being careful. Of not checking that the road was clear, before opening the door. I know what I did was extremely dangerous and clumsy. I could’ve been seriously injured; I could’ve seriously injured another person.

I am already feeling extremely guilty without being scolded. But my dad, being the bad cop, just had to:

“WHAT HAVE YOU DONE?! YOU ARE ALWAYS LIKE THAT! NO MATTER HOW MANY TIMES YOU ARE TOLD TO BE CAREFUL! DIDN’T I JUST REMINDED YOU YESTERDAY TO CHECK THAT THE ROAD IS CLEAR BEFORE OPENING THE CAR DOOR?”

It sucks really badly, when you are already suffering a bad consequence, when you already feel guilty, when you know you’ve done something wrong…

As if it’s not enough, you have to be scolded, blamed, reminded of that pain again.

We would like to apologise

We (Recompound) realise that we have inadvertently done this (calling out people for their negligence, emotions for acting irrationally) too, to many people out there.

Many people have lost lots of money in their investing life, be it through following recommendations, buying products, subscribing to services, whatever it is.

If you have lost money while investing, you must know how painful it is to lose your hard-earned money. You may have already let it go (relakan), you may have told yourself that it was a learning experience, or you may sometimes still blame yourself for not doing better.

So this time round, instead of telling you that you have indeed done the wrong thing in mindlessly following others, not doing deep enough due diligence before buying a service and product, we are going to tell you that you are not wrong.

Yes, you are not wrong in following others’ recommendation, in falling victim to bad product / service. And we’re going to prove this to you using our best friend: mathematics.

Toby follows Tibo’s recommendation

To make the scenario simpler, let’s say that I (Toby) have a friend Tibo who’s really into stocks. Tibo started investing on his own, but is proving to make money. So Tibo starts his stocks community on Telegram and invites me to join his community. And I thought, why not?

This week, Tibo releases a very in-depth analysis on stock YESS. He recommends everyone in the Telegram group to buy that stock. But I am a new member, so I am not sure if I should follow his recommendation. Being cautious, I decide to sit out and watch first. True enough, by the next week, the stock price increased by 35%. “Ugh, why didn’t I follow his recommendation?” I thought to myself.

Then comes a second recommendation on MAYB. This time I decide not to make the same mistake and followed the recommendation straight away. I wouldn’t want to miss an opportunity to make money, would I? But it has now been 3 months and the stock price has not gone anywhere yet…

A third recommendation is on stock OKAY. I followed the recommendation and in 2 weeks it gives me a 10% return. Not as good as 35%, but I’ll take it.

The fourth recommendation is on stock BADD. Again I followed. But in 3 days, the stock tanked -25%. What is wrong? Did Tibo made an unintentional mistake?

The math says I should buy that stock

I know a little bit of math, so I decide to do some analysis.

Now I know that in the investing world, there are a lot of bad signals. I know that ill-intentioned people exist; these are people who purposely give bad signal and receive undercover money.

So now there is a possibility that Tibo is a good person, or an ill-intentioned person.

Suppose Tibo is a good person. He is already earning money from my subscription fee to this Telegram group, and he claims that he can give people at least 12% return annually, with his track record being 25% on average in the past years. So if Tibo is indeed a good person, I should get at least 10% net while paying out 2% to him for the subscription fee.

Now suppose Tibo has ill intention. Suppose also that if he is ill-intentioned, he will make me lose 10% of my portfolio and will receive some back-door payment equivalent to this 10%.

Putting this in a table format,

where the first number is how much Tibo will get and the second number is how much I will get.

Now I don’t know if Tibo is good or bad. There is a certain probability p that Tibo is bad. Now I calculate my expected return given this uncertainty.

Ok, don’t get scared. What does the bottom 3 lines mean? It is simply:

• If p is less than 0.5, my expected return is positive. This means I should expect to make some money by following Tibo’s advice many times (not just 1 time!).

• If p is equal to 0.5, my expected return is 0. This means I would not gain or lose money by following Tibo’s advice many times (not just 1 time!).

• If p is greater than 0.5, my expected return is negative. This means I should expect to lose money by following Tibo’s advice many times (not just 1 time!).

So my threshold is p = 0.5. What does this “p” mean? Well, I can interpret this in 2 ways.

First, I can think of p as the probability that Tibo is a bad person — this is about Tibo as a person, which is different from the second point below. In a generic case, there is 50-50 chance that a person is good or bad, which can be applied to Tibo as well. Since this means p = 0.5, then it also means that my expected return = 10 - 20 * 0.5 = 0. Well, this is not too bad right. At least the worst thing that can happen to me is that I don’t lose nor gain.

Second, I can think of p as the probability that Tibo gives out bad signal — this is about the signal that Tibo gives. This simply means Tibo could engage in a mixed strategy, where he gives his followers good signal 50% of the time and gives us bad signal 50% of the time. As long as he only gives bad signal 50% of the time or less, my return would be either 0 or positive. If I can be sure of this, I will take the chance. One way I can check this is by looking at his past stock recommendation and see the % of good and % of bad signals.

I am not irrational, and so are you!

By now I hope it is clear to you (my readers) that if you have indeed been following people’s stock recommendation or buy investment products/services, you are not irrational.

Indeed, it makes mathematical sense to do so.

But you may ask, why do you still lose money then?

Reason #1: I start small, then I became greedy

Remember this table?

The payoff that I wrote is in % terms. So if Tibo is a good person, I will get 10% returns from my capital. If Tibo is a bad person, I will get -10% returns from my capital.

Also remember another fact about human behavior: we get greedy. I may start small, investing maybe IDR 1 million in Tibo’s first recommendation. In a week, I score +10%! I feel happy and feel that Tibo is trustworthy. So on his second recommendation, I put in IDR 5 million. Again I make +20%! So the happiness and the trust grows. On his third recommendation, I put in IDR 10 million. Now it’s +30%! I’ve made IDR 4,100,000 because of Tibo. I can safely say that Tibo is my best buddy and I will sell my kidney for him.

On his fourth recommendation, I put in IDR 100 million. This time round, either he scams me or he made unintentional mistake (idk), but I lost 10% :( That’s IDR 10 million. I’ve lost all the IDR 4,100,000 from the previous profits and even more :((

So my strategy to follow Tibo only works if I invest the same amount of money every time he recommends a stock.

Reason #2: the devil is in the table

Remember that table again?

For this particular table, the threshold p is 0.5. This means that if I can be sure that Tibo gives bad recommendation 50% of the time or less, then I should follow his recommendation.

But once I change the payoff structure, the p threshold changes too.

It is not unimaginable to think of Tibo possibly giving me recommendation that will cause me to lose 50% of my capital (recall: IPO stocks of 2021/2022). So if the maximum downside is -50%, I would only trust Tibo if he gives bad recommendation 16% of the time. This means that out of 100 stocks that he recommends, 84 are good stocks which averaged out gives me +10%, while 16 are bad stocks which averaged out gives -50%. If his past records show that he gives out 80 good stocks and 20 bad stocks, I would not follow him.

In an ideal world…

What I’ve just described is an ideal world where (i) I can be discipline in investing the same absolute amount every time I follow Tibo’s recommendation and (ii) Tibo has existed long enough for me to analyse his past recommendation so that I can compute his bad stock rate (p) and construct the payoff table like the ones above.

But in reality, we probably only analyse the past 10-20 (or less) recommendation of a person given in a short period of time. As a result, we might end up with an inaccurate table like so:

Which means that based on that 20 recommendation in the past 3 months, I saw that Tibo has only given 4 bad recommendation, hence “real” p = 0.2. The 16 good recommendation gives an average of +30% return while the bad recommendation gives an average of -10%. Given that the threshold p is 0.75, I should definitely follow Tibo!

But remember, this is a truncated data that does not reflect the truth!

Going back to not rubbing salts on wound

Hopefully this post has shown that if you’ve trusted someone and ended up losing money (either unintentionally or because of the ill-intention of others), you are not stupid / wrong / irrational / {inset whatever insults people have thrown at you or you to yourself}.

Indeed the math has shown that it probably makes sense for you to trust that person.

But now you also know why you may still lose money, either because of human nature or because you’ve computed the math based on inaccurate data.