borrowed $500,000 from friends&family to invest..foolish promised 10%

[mistymoney]

This tale has me between tears and heartburn. I can't imagine......


https://www.msn.com/en-us/money/personalfinance/and-then-2022-happened-i-borrowed-500-000-from-friends-and-family-to-invest-in-the-stock-market-foolishly-promising-a-10-return-can-i-avoid-legal-action/ar-AA17f2k7?cvid=e0ad9f8515dd464988e65e087afb1ea4

I am a budding options/futures trader with my own sole proprietor investment business.  Heading into 2022, I took on a large cash infusion of $500,000 from friends and family under the guise of a promise I made to issue a 10% return on their money. This promise was made via a signed promissory note, and the return was less than the annual return I had been experiencing years before.

And then 2022 happened. It was an extremely bad year for the markets, and the worst I’d seen since I had been actively trading. Needless to say, I was not able to make due on my promise and I am not in a place where I have funds left to pay back those friends and family. This has severely fractured some of the relationships I value the most, and put my friends and family in a very stressful situation. 

I still plan to make financial restitution to everyone, but since then I have to rebuild my finances almost from scratch. The question I have is twofold: What’s the best way to mend and repair the relationships with friends and family, and to what extent could I be faced with punitive legal action? Your advice is greatly appreciated.

[Psychstache]

Maybe he could bring in new investors with his 10% returns and use their money to pay his original investors their returns. He could do this for a while until he rights the ship. What could go wrong!

/s in case it was not clear.

[Dancin'Dog]

This tale has me between tears and heartburn. I can't imagine......


https://www.msn.com/en-us/money/personalfinance/and-then-2022-happened-i-borrowed-500-000-from-friends-and-family-to-invest-in-the-stock-market-foolishly-promising-a-10-return-can-i-avoid-legal-action/ar-AA17f2k7?cvid=e0ad9f8515dd464988e65e087afb1ea4

I am a budding options/futures trader with my own sole proprietor investment business.  Heading into 2022, I took on a large cash infusion of $500,000 from friends and family under the guise of a promise I made to issue a 10% return on their money. This promise was made via a signed promissory note, and the return was less than the annual return I had been experiencing years before.

And then 2022 happened. It was an extremely bad year for the markets, and the worst I’d seen since I had been actively trading. Needless to say, I was not able to make due on my promise and I am not in a place where I have funds left to pay back those friends and family. This has severely fractured some of the relationships I value the most, and put my friends and family in a very stressful situation. 

I still plan to make financial restitution to everyone, but since then I have to rebuild my finances almost from scratch. The question I have is twofold: What’s the best way to mend and repair the relationships with friends and family, and to what extent could I be faced with punitive legal action? Your advice is greatly appreciated.

Sounds like he didn't include enough "fine print" in the contract.  But, on the bright side, they're all probably as dumb as he is.  LOL!

[ATtiny85]

The person forgot that ponzis only work with a continuous source of suckers. And a much better documentation fakery plan. Such a rookie.

[FLBiker]

The striking thing to me is that they still don't seem to get it.  The first line is "I am a budding options/futures trader" -- in other words, present tense, that's still their plan.  And they blame their failure on the fact that "2022 happened" even though years like 2022 happening is a totally normal phenomenon.  More heartbreak ahead, I suspect.

[yachi]

The striking thing to me is that they still don't seem to get it.  The first line is "I am a budding options/futures trader" -- in other words, present tense, that's still their plan.  And they blame their failure on the fact that "2022 happened" even though years like 2022 happening is a totally normal phenomenon.  More heartbreak ahead, I suspect.

Well, and the thing is 2022 wasn't even a particularly bad year.  I didn't even realize it was bad enough to have stories like this one making the rounds.  Promising 10% from stock market investments is rather stupid, as there are years where a good return would be preservation of capital in a double digit S&P 500 loss.  That's the reason most agreements are tied to performance vs an index.  It's easier to get double digit returns on something like lending hard money for real estate deals because it can be built into the next deal, and it's somewhat removed from the markets.

[ChickenStash]

Assuming that is real and not just a made-up question acting as a cautionary tale then I hope Madoff Jr. and the people he conned learned something valuable.

[Paper Chaser]

The striking thing to me is that they still don't seem to get it.  The first line is "I am a budding options/futures trader" -- in other words, present tense, that's still their plan.  And they blame their failure on the fact that "2022 happened" even though years like 2022 happening is a totally normal phenomenon.  More heartbreak ahead, I suspect.

Well, and the thing is 2022 wasn't even a particularly bad year.  I didn't even realize it was bad enough to have stories like this one making the rounds.

Since 1930, there have been 6 years where the S&P500 had worse returns than 2022. Negative returns aren't super rare, occurring 29 times since 1930 (nearly 1 in 3), but I think it's fair to consider 2022 a pretty bad year historically speaking.

The person in the story still made some really poor choices though.

[GuitarStv]

I've never seen a time where someone promises you a guaranteed 10% return on investment and it doesn't end up that they were lying at the time the promise was made.

[HPstache]

A good options/futures investor should be able to make big money in a down market as well.

[FINate]

Yikes! They say they want to make full restitution,  yet this is easier said than done. Seeking to avoid legal action (a.k.a. making good on their promises) betrays an intention to avoid fully owning the problem and making the hard sacrifices necessary to make people whole.

This is why I never lend or invest to friends or family as a matter of principle. If there's a legitimate need I may, and have in the past, give a monetary gift. But when folks I know come with proposals and investing ideas I make it very clear that this is something I never do and it's not personal, just not worth the relational carnage.

[Rob_bob]

When that guy said he was a "budding" trader he must be pretty bad.  I sell cash secured puts and covered calls and am not a deep dive details options guy.  Just quick paper napkin math and for 2022 I had a yield easily over 15% for the year.

[ChpBstrd]

Leveraged long works wonderfully until the stock market goes down. It happens every time.
https://www.bogleheads.org/forum/viewtopic.php?t=5934

[clarkfan1979]

A good options/futures investor should be able to make big money in a down market as well.

Based on the article, he is a "budding" options/futures investor. Perhaps he has not yet reached the threshold of "good"? Maybe 2023 is the year he reaches "good" status?

[vand]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them). 
This dude is one of the 90%.

He's learnt a hard lesson - suck it up and move on.

[Malossi792]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them). 
This dude is one of the 90%.

He's learnt a hard lesson - suck it up and move on.

Based on the exact words used, I'm not sure they have ...

[GuitarStv]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them). 
This dude is one of the 90%.

He's learnt a hard lesson - suck it up and move on.

I've never really thought of trading as a zero sum game.  The stocks represent value of companies, so as the companies improve the value of the stock should go up.  Should be plenty of room for everyone who isn't being greedy to profit.

[vand]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them). 
This dude is one of the 90%.

He's learnt a hard lesson - suck it up and move on.

I've never really thought of trading as a zero sum game.  The stocks represent value of companies, so as the companies improve the value of the stock should go up.  Should be plenty of room for everyone who isn't being greedy to profit.

Doesn't have to be a zero sum game - there's a great myth that everyone can win in this game - some more than others, but nobody has to earn less than 0%.  I'm afraid that's just not true - the machine still concentrates wealth upwards, and that doesn't preclude some people from losing money. Just because the pie grows larger over time, it doesn't mean that everyone can have more pie. Capitalism itself is built upon winners and losers.  If everyone could make money by staying at home every and daytrading every day then that's just what would happen - the brutal truth is that very few can do it.

[GuitarStv]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them). 
This dude is one of the 90%.

He's learnt a hard lesson - suck it up and move on.

I've never really thought of trading as a zero sum game.  The stocks represent value of companies, so as the companies improve the value of the stock should go up.  Should be plenty of room for everyone who isn't being greedy to profit.

Doesn't have to be a zero sum game - there's a great myth that everyone can win in this game - some more than others, but nobody has to earn less than 0%.  I'm afraid that's just not true - the machine still concentrates wealth upwards, and that doesn't preclude some people from losing money. Just because the pie grows larger over time, it doesn't mean that everyone can have more pie. Capitalism itself is built upon winners and losers.  If everyone could make money by staying at home every and daytrading every day then that's just what would happen - the brutal truth is that very few can do it.

I don't think it's a myth that everyone can win at the game . . . just that some people don't understand the correct way to play to achieve that.  Day trading is one way to greatly increase your odds of losing.  A buy and hold indexing strategy is one way to greatly increase your odds of winning.  In the latter, there really isn't a pool of losers.  That's why I mentioned 'greed' in my previous post.

[YttriumNitrate]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them).  This dude is one of the 90%. He's learnt a hard lesson - suck it up and move on.

I've never really thought of trading as a zero sum game.  The stocks represent value of companies, so as the companies improve the value of the stock should go up.  Should be plenty of room for everyone who isn't being greedy to profit.

I guess this depends a lot on your definition of "win." If the representative index (i.e., something with the same risk) has averaged 15% gains per year for the last five years, and a trader has only managed 2% gains in that same time, have they won?

[nouseforausername]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them). 
This dude is one of the 90%.

He's learnt a hard lesson - suck it up and move on.

I've never really thought of trading as a zero sum game.  The stocks represent value of companies, so as the companies improve the value of the stock should go up.  Should be plenty of room for everyone who isn't being greedy to profit.

Doesn't have to be a zero sum game - there's a great myth that everyone can win in this game - some more than others, but nobody has to earn less than 0%.  I'm afraid that's just not true - the machine still concentrates wealth upwards, and that doesn't preclude some people from losing money. Just because the pie grows larger over time, it doesn't mean that everyone can have more pie. Capitalism itself is built upon winners and losers.  If everyone could make money by staying at home every and daytrading every day then that's just what would happen - the brutal truth is that very few can do it.

I don't think it's a myth that everyone can win at the game . . . just that some people don't understand the correct way to play to achieve that.  Day trading is one way to greatly increase your odds of losing.  A buy and hold indexing strategy is one way to greatly increase your odds of winning.  In the latter, there really isn't a pool of losers.  That's why I mentioned 'greed' in my previous post.

Agreed on all points, but re: Day trading:

It's actually > 99% losers, at least according to case study on trading behaviour out of UC Berkeley.

So, if you treat anything as a "game," you'll eventually "lose" at it by definition given enough distinct attempts at playing said game.

Index or Lose.

https://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/The%20Cross-Section%20of%20Speculator%20Skill.pdf
[Sorry can't find HTML version]

[vand]

In the UK there are new recent laws for spreadbetting operators who have to publicize the number of losing traders they have. I will post some of their results from the better known companies:









You get the idea.

If making money trading is just as simple as buying something on margin that goes up over the long term, don't you think the overwhelming majority of new traders could figure it out and be profitable?  I mean, the formula isn't exactly rocket science.

[GuitarStv]

If making money trading is just as simple as buying something on margin that goes up over the long term, don't you think the overwhelming majority of new traders could figure it out and be profitable?  I mean, the formula isn't exactly rocket science.

Nope.

The average person does plenty of stupid stuff that's detrimental to their long term health, wealth, and happiness all the time.  A combination of lack of information, misinformation, and greed tend to push people in other than optimal directions for trading.

[vand]

The basic truth is that for 10% of traders to win 90% have to lose -- I have clearly stated this elsewhere which has been denied (haha - more fool them). 
This dude is one of the 90%.

He's learnt a hard lesson - suck it up and move on.

I've never really thought of trading as a zero sum game.  The stocks represent value of companies, so as the companies improve the value of the stock should go up.  Should be plenty of room for everyone who isn't being greedy to profit.

Doesn't have to be a zero sum game - there's a great myth that everyone can win in this game - some more than others, but nobody has to earn less than 0%.  I'm afraid that's just not true - the machine still concentrates wealth upwards, and that doesn't preclude some people from losing money. Just because the pie grows larger over time, it doesn't mean that everyone can have more pie. Capitalism itself is built upon winners and losers.  If everyone could make money by staying at home every and daytrading every day then that's just what would happen - the brutal truth is that very few can do it.

I don't think it's a myth that everyone can win at the game . . . just that some people don't understand the correct way to play to achieve that.  Day trading is one way to greatly increase your odds of losing.  A buy and hold indexing strategy is one way to greatly increase your odds of winning.  In the latter, there really isn't a pool of losers.  That's why I mentioned 'greed' in my previous post.

Being an indexer doesn't preclude someone from having being a lousy investor if you can't also control your emotions.  It's possible to lose just as much money trading the S&P as it is trading Dodgecoin.

And not everyone can be an indexer - there has to be active price discovery of individual securities at some level for indexing to work, so there has to be some active bets being made. You can't put the cart before the horse.  It's true that we don't know where the limit lies between how much passive can be had on top of active, but it is definitely not 100:0 and probably not 99:1. 

In any system where fortunes can be made through patience, discipline and a tolerance of risk, fortunes can also be lost through lack of those.

[vand]

If making money trading is just as simple as buying something on margin that goes up over the long term, don't you think the overwhelming majority of new traders could figure it out and be profitable?  I mean, the formula isn't exactly rocket science.

Nope.

The average person does plenty of stupid stuff that's detrimental to their long term health, wealth, and happiness all the time.  A combination of lack of information, misinformation, and greed tend to push people in other than optimal directions for trading.

You forgot the biggest one: the employment of leverage.

[Psychstache]

In the UK there are new recent laws for spreadbetting operators who have to publicize the number of losing traders they have. I will post some of their results from the better known companies:

[Images removed to keep post manageable]

You get the idea.

If making money trading is just as simple as buying something on margin that goes up over the long term, don't you think the overwhelming majority of new traders could figure it out and be profitable?  I mean, the formula isn't exactly rocket science.

I don't know that this will really have the impact they hope for. Most people will not even read the banner before closing it, some will glance and then habituate to it and move on, and many more will read it and just assume they are so awesome that they are in the 23% that will make money.

[mistymoney]

In the UK there are new recent laws for spreadbetting operators who have to publicize the number of losing traders they have. I will post some of their results from the better known companies:









You get the idea.

If making money trading is just as simple as buying something on margin that goes up over the long term, don't you think the overwhelming majority of new traders could figure it out and be profitable?  I mean, the formula isn't exactly rocket science.

I think it depends on a lot - how much margin? How long you keep margin, etc. Like that boggleheads story (which kept me rivetted for days going through that thread the first time I saw it mentioned!). He just kept borrowing! margin account, credit cards, loans. He kept buying more and more and more on an increasing debt loan, and when he couldn't borrow anymreo from anywhere, then the margin calls/forced sale of the assets. It was like a Greek tragedy really (Icarus). I think it might have been mentioned in  the thread.

And it was also discussed that at most time during the market, that his strategy would have worked. Especially given how much additional money he kept coming up with and throwing at the problem. If it hadn't been documented in real time, you'd think it was faked as a cautionary tale!

But I think if someone has a pretty good paying job and has a continuous amount of new money and doesn't leverage quite so completely they could maybe be successful with a little leverage.

That said - I am a no leverage kind of person. Maybe with a mortgage, with a payment you can make, but that is about it for me.

[clarkfan1979]

In the UK there are new recent laws for spreadbetting operators who have to publicize the number of losing traders they have. I will post some of their results from the better known companies:









You get the idea.

If making money trading is just as simple as buying something on margin that goes up over the long term, don't you think the overwhelming majority of new traders could figure it out and be profitable?  I mean, the formula isn't exactly rocket science.

I think it depends on a lot - how much margin? How long you keep margin, etc. Like that boggleheads story (which kept me rivetted for days going through that thread the first time I saw it mentioned!). He just kept borrowing! margin account, credit cards, loans. He kept buying more and more and more on an increasing debt loan, and when he couldn't borrow anymreo from anywhere, then the margin calls/forced sale of the assets. It was like a Greek tragedy really (Icarus). I think it might have been mentioned in  the thread.

And it was also discussed that at most time during the market, that his strategy would have worked. Especially given how much additional money he kept coming up with and throwing at the problem. If it hadn't been documented in real time, you'd think it was faked as a cautionary tale!

But I think if someone has a pretty good paying job and has a continuous amount of new money and doesn't leverage quite so completely they could maybe be successful with a little leverage.

That said - I am a no leverage kind of person. Maybe with a mortgage, with a payment you can make, but that is about it for me.

I love mortgage debt for two reasons. One, there is no margin call. Two, if interest rates decrease, I can cancel my contract and go with someone else to get a lower rate. 

[mistymoney]

The striking thing to me is that they still don't seem to get it.  The first line is "I am a budding options/futures trader" -- in other words, present tense, that's still their plan.  And they blame their failure on the fact that "2022 happened" even though years like 2022 happening is a totally normal phenomenon.  More heartbreak ahead, I suspect.

Well, and the thing is 2022 wasn't even a particularly bad year.  I didn't even realize it was bad enough to have stories like this one making the rounds.

Since 1930, there have been 6 years where the S&P500 had worse returns than 2022. Negative returns aren't super rare, occurring 29 times since 1930 (nearly 1 in 3), but I think it's fair to consider 2022 a pretty bad year historically speaking.

The person in the story still made some really poor choices though.

made me look this up....

https://www.macrotrends.net/2526/sp-500-historical-annual-returns

[ATtiny85]

2022 would look a bit different if you smear the edges a bit. As an example, 2019 was a great year, but partly because of Dec 2018. 2022 was annoying, but partly because of how Dec 31 2021 was close a Top-is-in date (I don't recall exactly where the local max happened, but I believe it was really close to the end.)

I don't have enough interest to do it (I have bought equities every month for a couple decades and nothing that happens to the SP500 would ever make me change) but looking at a rolling 365 day chart seems like it would really temper things.

[YttriumNitrate]

2022 would look a bit different if you smear the edges a bit. As an example, 2019 was a great year, but partly because of Dec 2018. 2022 was annoying, but partly because of how Dec 31 2021 was close a Top-is-in date (I don't recall exactly where the local max happened, but I believe it was really close to the end.)
I don't have enough interest to do it (I have bought equities every month for a couple decades and nothing that happens to the SP500 would ever make me change) but looking at a rolling 365 day chart seems like it would really temper things.

You can see something similar by looking at the 1-year rolling returns (by month).
http://www.lazyportfolioetf.com/etf/spdr-sp-500-spy-rolling-returns/

[ATtiny85]

@YttriumNitrate  Nice! Thanks for posting that. I can easily conclude that 1) it looks different than I would have guessed, and 2) means nothing to me. But I like the various cuts of the market that is on that site. Looks like the market goes up and down…but trends up. Who would have thought!

[theolympians]

20 or so years ago, I was was a new hire in a non-financial industry. There were a couple old-timers that were convinced they could make $$ on commodity futures as a side hustle. I was interested and loved listening to their stories. They had also pulled in money from friends and family several times. Once they had 90K invested, other times 30k, other times less. The short is they lost it all. Again and again.

I was really interested to go in with them for the first few times they talked about it. However, they were honest and told me everything. So I didn't and recognized I didn't have a clue what they were investing in. I stuck with mutual funds and have a million plus in a retirement account. In those couple instances where I thought I was smarted than the market, I wasn't. Lost $$.

A common thing with people is that often we think we have it all figured out. Or one thing we see on the horizon is enough information to allow for decision. In this case, and many others, we can't see what else is coming, or it is discounted etc. Modern media doesn't help with promoting the tenth of one percent that happen to make it.

I feel for the friends and family that lost $$. I am hopeful the OP learns from the loss and steers clear of risky stuff in the future.

[vand]

2022 would look a bit different if you smear the edges a bit. As an example, 2019 was a great year, but partly because of Dec 2018. 2022 was annoying, but partly because of how Dec 31 2021 was close a Top-is-in date (I don't recall exactly where the local max happened, but I believe it was really close to the end.)

I don't have enough interest to do it (I have bought equities every month for a couple decades and nothing that happens to the SP500 would ever make me change) but looking at a rolling 365 day chart seems like it would really temper things.

Here's the thing about trading as opposed to investing: You can't blame the what the market does for your results.  As a trader you should be able to make money in any market.  If you are trading then you are, to all intents and purposes, making bets on the short term direction of an asset.  If you were employing long strategies in a falling market then you suck as a trader and deserve to lose your money.

Jesse Livermore said that the market goes up roughly 1/3 of the time, down 1/3 of the time, and sideways 1/3 of the time (a bit of a simplification, but it's good enough), and that the trader should be able to read the trend and trade accordingly. 

[vand]

Another one:

Friend daytraded my $600k away

https://www.youtube.com/watch?v=ala1v9Q-5vA

[dividendman]

I've never seen a time where someone promises you a guaranteed 10% return on investment and it doesn't end up that they were lying at the time the promise was made.

The US government was promising > 10% back in the 80s via Treasuries and they didn't default. Maybe you weren't alive though.

[RWD]

I've never seen a time where someone promises you a guaranteed 10% return on investment and it doesn't end up that they were lying at the time the promise was made.

The US government was promising > 10% back in the 80s via Treasuries and they didn't default. Maybe you weren't alive though.

Wasn't inflation also like 10% back then? Not exactly the best ROI

[GuitarStv]

I've never seen a time where someone promises you a guaranteed 10% return on investment and it doesn't end up that they were lying at the time the promise was made.

The US government was promising > 10% back in the 80s via Treasuries and they didn't default. Maybe you weren't alive though.

Wasn't inflation also like 10% back then? Not exactly the best ROI

Born early '80s so I was working more on object permanence than investment picking.  :P

[dividendman]

I've never seen a time where someone promises you a guaranteed 10% return on investment and it doesn't end up that they were lying at the time the promise was made.

The US government was promising > 10% back in the 80s via Treasuries and they didn't default. Maybe you weren't alive though.

Wasn't inflation also like 10% back then? Not exactly the best ROI

Born early '80s so I was working more on object permanence than investment picking.  :P

Same... also for the ROI part, @RWD if you bought the 30 year treasury yielding 15% in the early 80s you'd be sitting pretty by the mid-80s when inflation was down to 4-5%.

Obviously I'm just being pedantic... promising 10% is insane.

[Chris Pascale]

When that guy said he was a "budding" trader he must be pretty bad.  I sell cash secured puts and covered calls and am not a deep dive details options guy.  Just quick paper napkin math and for 2022 I had a yield easily over 15% for the year.

Well done.

[MustacheAndaHalf]

I don't think it's a myth that everyone can win at the game . . . just that some people don't understand the correct way to play to achieve that.  Day trading is one way to greatly increase your odds of losing.  A buy and hold indexing strategy is one way to greatly increase your odds of winning.  In the latter, there really isn't a pool of losers.  That's why I mentioned 'greed' in my previous post.

Agreed on all points, but re: Day trading:

It's actually > 99% losers, at least according to case study on trading behaviour out of UC Berkeley.

So, if you treat anything as a "game," you'll eventually "lose" at it by definition given enough distinct attempts at playing said game.

Index or Lose.

https://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/The%20Cross-Section%20of%20Speculator%20Skill.pdf
[Sorry can't find HTML version]

If your intent is to apply a lesson from Taiwan's Stock Exchange (TSE) to day traders in the U.S., this fee seems significant in the comparison:
"Taiwan imposes a transaction tax on stock sales of 0.3%"

Compare that drag on performance to the transaction fee charged by the U.S. SEC:
"... a new rate of $8.00 per million dollars in transactions."
https://www.finra.org/rules-guidance/notices/information-notice-021423

In the UC Berkeley study, the most active traders were the most profitable.  They didn't eventually lose, but kept winning.  To let rapper The Game tell it:

"Losers lose, winners win
This is real, we ain't got to pretend"
- Hate It Or Love It