Stupid investment of the week: Moneywayz.com

By Chuck Jaffe

Published: May 28, 2006

Anthony wanted to talk to me about a business. "This is not a get-rich-quick scheme, he said, "because if it was, everyone would be getting rich.

And then, by telephone, Anthony introduced me to Michael Hilliard, the founder ofMoneywayz.com. He played a taped introduction by Hilliard, who promised to let me in on "the greatest business in the world.

It was right about then that I concluded that Anthony was right, because the only guy I could be certain was getting rich on this program was Hilliard. That's also when it became obvious that Moneywayz.com was a Stupid Investment of the Week.

Stupid Investment of the Week showcases the flaws and conditions that make an investment less than ideal for the typical consumer, in the hope that highlighting danger in one situation will make it easier to root out elsewhere. While obviously not a purchase recommendation, neither is this column intended as an automatic sell signal, as there are times when dumping a worrisome investment simply compounds the trouble.

Because Moneywayz is a home-based business, it's not a traditional investment. But since a would-be entrepreneur gets involved in the hope of getting a return - a thriving business and income for life - it qualifies. Clearly, there may be consumers besides Hilliard who have made money with this business, and anyone with that kind of positive experience should not be scared off by my reservations about the company's plans being right for average consumers.

As Hilliard explained Moneywayz - and as Anthony clarified - there are six different business opportunities: Travelwayz sells memberships in an online travel service, Mortgagewayz pays you for generating mortgage refinancing leads, Healthwayz sells a discounted form of health-care coverage, Shopwayz allows you to build an online shopping mall and you can help Moneywayz itself recruit more members and get a commission for every person who follows you into the business.

With that "we need more people to join mentality, it looks like Moneywayz operates on the "greater fool theory, an investment idea which says that the only way to make money with a bad idea is to have someone else come along and keep pumping it up.

In his audio presentation, Hilliard basically suggested that all you needed to do to succeed in any of these businesses was place ads that the company had already created.

Anthony got me a password that allowed me to see the members-only portion of the site, and the ads range from visually annoying banner ads for Web sites to poorly written, dull, traditional newspaper ads. It's hard to believe any of the ads will generate much traffic; even when they do, it is clear that Hilliard's company will keep the bulk of the profits while the consumer struggles to pay off the cost of the ads.

If a consumer spends almost $400 for the Taxwayz product, for example, $100 of it winds up with the member who placed the ad that attracted the customer. Mortgagewayz pays "$500 every time someone applies and gets approved, a fine-line distinction which makes it clear that you get nothing for every candidate who follows your ad but doesn't qualify for a loan or who chooses to get financing elsewhere.

Each business has terms and conditions that feel icky. In every case, it boils down to you paying the advertising costs for someone else's business and hoping to get paid back for it.Anthony offered me a "first-call price of $295 for every business I opened. That's a $300 discount that he said was "designed to separate the curious from the serious. When I called back later to the number Anthony gave me, I could not reach him, and no one at the office could tell me how to reach Hilliard for comment.

Anthony, by the way, noted that he stood to make 2.5 percent of every dollar I brought in to the company.

That was going to include a lot more than just the cost of picking out one or more businesses. While he did not say what other costs there were, it is clear in talking to officials at the Better Business Bureau that many customers who took a flyer on Moneywayz were greeted with a big upsell to get them to buy the next product.

Moneywayz has an "unsatisfactory with the BBB "due to a failure to substantiate its advertised claims and due to a pattern of complaints.

And, as with most of these types of deals, there was a "money-back guarantee, whichAnthony said would allow me to get my money back if I didn't break even in 12 months.

While he suggested that this made the deal risk-free, the truth is that Moneywayz only refunds the money paid for the initial business deal, and not the money the customer spends on ads and trying to attract customers. Even if you can get the initial monies back, there's a good chance that the losses will be significantly more than bargained for if you have tried and failed to build this into a business.

In the end, it's too many hands grabbing at too little cash.

Hilliard's audio message promised that "You can make so much money with this program it will blow you away."

Whenever you hear a pledge like that, consider the alternative, namely that if the program backfires you could blow your own savings away.

Your Funds: Fund shift questions indexing's value
Amy Domini likes stirring things up. As head of the company running the world's largest social investment fund, she has taken on corporate giants trying to improve the way they do business and make them better citizens.

On Thursday, however, Domini stirred up her own fund, in a move that not only raises questions for shareholders in Domini Social Equity, but which highlights bigger philosophical questions facing investors in many index funds.

Domini notified regulators that her fund (ticker DSEFX) plans to change the way it is managed, leaving behind the trademark Domini Social Index and turning to an active management strategy. The move requires shareholder approval, and observers wonder whether investors actually will want to give it; others wonder if this kind of style shift is a sign of things to come for index funds.

The $1.2 billion Domini Social Equity fund is oldest and largest fund screening prospective investments for social and environmental reasons. The fund tries to deliver the gains of the Domini 400 Social Index - which is made up mostly of large-cap stocks - in the hope that investors can do good and do well at the same time.

The fund is just barely above average over the last decade, but it has been a bit of a lemon since 2000. For the last six full calendar years, the fund finished just one in the top half of its peer group, according to Morningstar Inc.; it had two years in the bottom 15 percent of its peers, which is also where it stands thus far in 2006.

That lagging performance pushed Domini to make a change.

"For the last six years, it has been difficult to get stellar performance using the index strategy, Domini said on Thursday. She noted that industry weightings required by the index strategy made it difficult to add value, saying "I have felt that the investor was better off in an active strategy for a while now.

Testing her theories, Domini Social Investments opened its European Equity Fund last fall. Domini's firm screens the universe of acceptable stocks, and then lets Boston's Wellington Management Co. use a quantitative approach to run the dollars. (Quantitative investing uses computer models to make unemotional trading decisions; Wellington's plan for the Domini fund considers more than 60 factors, mostly concerning a stock's value and momentum.)

Domini's European fund has killed the benchmark index over its short history. Year-to-date, Morningstar shows that the new fund has beaten the MSCI EAFE Index by a full 10 percentage points.

That was enough to convince Domini to make the big change.

If shareholders approve of the strategy shift, money management chores at the domestic fund will go to Wellington, so that Domini's flagship fund operates just like its new sister. Domini will maintain positions in stocks that management has started a dialogue with, as part of its push for social changes.

"There is no change in the agenda, just in the way the money is being run, Domini said.

But investors typically have their own agenda, and they may not be up for the change.

Switching from a passive to an active strategy comes at a cost; the fund's expenses will rise to 1.15 percent from 0.95 percent. The fund's universe of potential investments is expanding, which could tilt it away from large-company stocks a bit.

Then there is the big issue, the fundamental difference between indexing and active management; supporters of index investing can be hard-nosed in their attitudes of how a fund should be managed.

"For a lot of people, indexing is a religion, says Stephen M. Savage, editor of the No-Load Fund Analyst newsletter. "Changing to a quantitative approach is not as stark as if they hired an active manager to pick stocks qualitatively using fundamental research, but it's still a step away from what most index investors are used to.

Here's where the story has broader implications. Indexing came into vogue decades ago, first because big institutional investors thought it was a good way to run money, and then because consumers wanted in. It appears that "quant investing is going through a similar renaissance now, with a lot of smart institutional dollars going to managers who use this more flexible, less-static approach.

"Indexing diehards have been getting their heads handed to them for investing with blinders on, and so they are shifting their focus, says Dan Wiener, editor of The Independent Adviser for Vanguard Investors. "They are creating indexes that look and feel more like actively managed funds, or they are moving more towards quantitative management. It's not indexing the way most people know it.

Ultimately, investors in the Domini fund must decide to accept the change or to go with other social funds that take an index approach.

(Many firms could make a change of this magnitude without even notifying shareholders in advance, but Domini must win a proxy vote; management is hoping to get approval and make the change by November.)

"Investors usually want superior performance, and we think this is the way to get it, said Domini. "Even someone who loves indexing should realize that we wouldn't do this if we didn't think the results will be better.

JAFFE'S SHORT COURSE: Knock-out option
A knock-out option is a form of derivative where the buyer has a right but not an obligation to buy the underlying currency, commodity or other position at a set price.

Unlike regular options, this derivative contract becomes worthless it gets "knocked out" if the underlying asset goes through a certain price level.

For example, a knock-out option based on the value of the U.S. dollar against the euro would expire and become worthless if the dollar falls below a specified exchange rate against the euro. Knock-outs tend to be cheaper than regular options, allowing investors to take larger positions for less money. As a result, they are popular with hedge funds and other speculative investors.

FINANCIAL HOUSEKEEPING: Make smart IRA decisions
With limits and rules for individual retirement accounts seemingly changing all the time, investors may be confused about how much they can set aside and the best way to do it.

Morningstar.com has an IRA calculator that puts the basic information and decisions all in one place. The site's IRA calculator walks savers through their IRA eligibility, compares various scenarios to see which type of IRA is best, and helps them decide whether they should convert a "traditional IRA" into a "Roth IRA."

To go directly to the calculator, check out screen.morningstar.com/IRA/IRACalculator.html.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.