Investing

How Savvy Investors Can Avoid Major Losses Due to Lies

By Pamela Meyer, certified fraud examiner and expert in deception detection

The recent stories involving Rep. George Santos and SBF (Sam Bankman-Fried) have something big in common: They serve as powerful reminders that anyone can be duped by lies.

In my decades focused on spotting lies, I’ve often seen the devastation that fabricators can bring to people’s lives and their finances. It’s a universal problem and a major reason my TED Talk, How to Spot a Liar, has more than 32 million views and has been translated into more than 30 languages. People all over the world want, and need, to protect themselves with this essential skill.

Every time the public learns about another serial liar, I get a new influx of calls from executives wanting to know how they can avoid being taken in by people like this. It happens every time Elizabeth Holmes pops up in the news, for example.

When it comes to investors in the stock market, I tell them that they need to be on alert as much as anyone else. Yes, it’s helpful to know that the SEC can be on the lookout. But liars are clever and often go unnoticed until it’s too late. 

Stock market history is riddled with share values plunging after fraud, deception or material omissions are discovered, sometimes in the C-suite of a major corporation. In my book Liespotting, I cite the case of Veritas. The company’s shares fell 19% to their 52-week low after CFO Kenneth E. Lonchar was caught falsifying his education on his resume. 

The good news is that you can learn the skill of spotting lies and eliciting hidden truths. The same techniques previously taught to spies and interrogators are available for everyone to learn. Having worked with investors, I’ve seen many develop this expertise, and build much stronger portfolios as a result.

Check your blind spots

One of the most important steps is to look inward for your own vulnerabilities. Even the savviest investors are susceptible to the lure of fast cash that's too good to be true, to the rosy statements that predominate earnings calls, quarterly reports, and CNBC interviews, and to the satisfaction of thinking they made a clever move. They might not look closely for weak points in the company’s financial statements, being blinded instead by spin.

Crucial signs of deception are often buried in footnotes, quick offhand remarks that seem irrelevant, or what’s called a “lie sandwich,” in which someone shares two truths immediately before and after a lie. Very often, when charismatic people do this, they aren’t caught. I teach people to set aside their hopes and feelings, and instead focus on every piece of concrete information they can get.

Focus on what’s missing

The most common form of deception is omission. List what you know about a company, and what you’d like to know. Search for the missing details. If those details aren’t available, that can be a red flag.

On this, top-notch equity analysts can be very helpful. It’s a good reason to stay on earnings calls until the very end. Often, these analysts ask questions that get at details the executives and corporate spokespeople may have glossed over. An analyst might ask about the company’s high inventory, receivables, accounting practices or personnel changes, for example. 

In cases like this, it’s especially important to listen not just to the answer, but also to the follow-up question. When an analyst digs deeper, they move the speaker further away from canned, prepared answers, and are more likely to get a glimpse into matters that the company may not want to shine a light on. When they drill down hard on unexpected questions they raise the cognitive load on their target—and that’s when the highest volume of deceptive tells surface.

Of course, these liespotting tactics just scratch the surface. You also need to watch out for use of non-standard metrics, convincing statements, deflection, minimizing a negative rather than explaining it, and much more. 

To be fair, none of this means that businesses are always lying to you. Many executives are honest and will tell you about both the good and the bad. CEOs have been praised for their honesty and trustworthiness. In fact, a new study highlights the importance of business leaders demonstrating “honesty and transparency.”

The more you hone the skill of deception detection, the less likely you’ll be to lose your investments. And that gives not only your portfolio, but also the stock market and the economy, a brighter future.

Pamela Meyer, a certified fraud examiner, teaches a Masterclass titled Deception Detection and Getting to the Truth. She is founder and CEO of Calibrate, and her TED Talk is one of the 15 most watched of all time.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.