Don’t invest based on a company’s fancy address

30 03 2008

Don’t invest based on a company’s fancy address

Posted by: in Housing

Filed under: Scandals, Entrepreneurs, Housing

A piece in the latest issue of BusinessWeek discusses an interesting trend among scammers, charlatans, and con-artists: they’re renting out virtual offices on Wall Street in an effort to enhance their credibility and project an image of success. For just $100 a month, they get a fancy address to put on stationary, a post office box, and a conference room they have the ability to use for occasional meetings — all shared with dozens, or even hundreds or other clients.

The president of one company that rents out virtual offices to businesses told BusinessWeek that “As much as our services help hundreds of small businesses brand themselves, there will always be crooks who try to misuse the polished facade for their dirty business.”

Maybe I’m a prude, but I would have nothing to do with a company using a “virtual office” for its address, even a legitimate one. I would argue that the goal of these set-ups is to mislead potential investors or customers — projecting an image of something that differs from reality. Even if the company is legitimate, a phony address is still dishonest.

In any case, investors shouldn’t be hoodwinked by a fancy sounding address. After all, Worldcom and Enron also had great addresses and pretty offices, and investors lost billions.

To avoid getting scammed — or just losing money on a bad investment — there are two things you can do: make sure you comprehend how a company makes its money, and make sure the returns offered aren’t too good to be true. As the managers of West Coast Asset Management wrote in their book The Entrepreneurial Investor, the people who really understood Enron’s business model did quite well — but ended up in jail.

And use common sense. One firm that was using a “virtual office” promised returns of 25-30% per month. That’s a better return per month than Warren Buffett earned per year. And if they could earn those great returns, why would they need your money? If it’s so risk-free, can’t they just borrow it from a bank for a lot less money?