Why Are Chinese Stocks Down This Year? | The Motley Fool

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Chinese stocks are down 14% so far this year, and in this episode of Motley Fool Answers, Motley Fool analyst Ben Ra joins us to explain why. The Ascent’s Brian Frey shares the red flags of a pyramid scheme, and we answer a question on which types of stocks belong in which types of accounts.

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This video was recorded on September 21, 2021.

Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick and I’m joined, as always, by Robert Brokamp, Personal Finance Expert here at The Motley Fool. Hi, Bro.

Robert Brokamp: Hello, Alison. Hello.

Southwick: On this week’s show, we’re going to talk about the very fine line between multilevel marketing and a pyramid scheme. Curious why your international stock funds haven’t done so well this year? It might be because they hold stocks in Chinese companies which are down 14% so far in 2021. Motley Fool analyst Ben Ra explains why. Finally, we answer the question about which stocks should go in which accounts. All that and more on this week’s episode of Motley Fools Answers.

Before we get to the show — you thought we were going to go right into the show. No. But before we do, it’s that time of year again where I ask listeners like you for a favor. That’s because the Motley Fool’s great, big, annual all-company event is coming up, and I’m looking for a few volunteers to help me with a project so that Fool employees can get to know our members better. Pretty please, if you’re willing to work with us to share your story as a Fool member, drop me a line at answers@fool.com. All you have to do is say, how can I help, and I’ll be in touch with the next steps. Pretty please, just send me an email. Back to the show. It’s 2016 and you stumble upon a live stream. Maybe you’re on Facebook or YouTube, and it’s a heavyset, middle-aged man, bearded, a bit like Santa on summer vacation. He’s sitting in front of a wall, stacked brightly colored fabric, and he’s selling a pair of women’s leggings, holding them up to the camera and describing them as butter is soft. In an easygoing draw, this one’s got a cute little kitty cat pattern on it. No one wants to buy it. What is going on? Again, it’s 2016 and you were witnessing, or maybe me, one of the fastest-growing companies at the time, growing 24% a month on its way to $2.3 billion in revenue the following year. The company is LulaRoe, and it’s the subject of a new documentary series on Amazon Prime. I won’t give away too much. But LuLaRoe is a multilevel marketing company. Although a few lawsuits and legal actions, The Washington Post pegs it at around 50, claiming that they are much more like a pyramid scheme. Now, it seems like a good time to talk about multilevel marketing and how to tell if you’re actually in a pyramid scheme or a cult as one woman in the documentary describes it. Multilevel marketing companies are a $35 billion industry.

An AARP estimates that one in 13 Americans have participated in one at some point. Sometimes called network marketing. It’s a form of direct selling; Avon, Mary Kay, Tupperware, and Amway might come to mind. But there are hundreds of them operating in the U.S. alone, selling everything from candles and cosmetics to jewelry, vitamin supplements, and kitchen tools. What makes an MLM company an MLM company? As Robert Fitzgerald said in the Luther rich series, multi-level marketing turns a company’s sales force into its customers. That’s because the people who are selling the products, often directly to friends and family, and on Facebook, to people they haven’t seen since high school, they have to first purchase inventory from the company. While the fee for getting started could be as low as $100, you may need to make a minimum investment that’s much, much more expensive than that to buy all these products, which brings us to our first red flag. For this, I’m looking to Brian Frey from The Motley Fool’s Ascent team, which helps people make more informed personal finance decisions such as choosing the right credit card or a broker. Here is Brian.

Brian Frey: You might be in a pyramid scheme if you hear the words, be your own boss. That should raise an eyebrow. When I was in college, I was pitched a gig to paint houses and I was told I could be my own boss, set my own hours, and that came with a lot of responsibilities, like buying paint and tools, most of which would cost thousands of dollars. But you had to buy these from, you guessed it, the company rep who recruited you. If it’s thousands of dollars to buy upfront, especially from the company who recruits you, whether it be painting tools or paying a mandatory training or membership fee, you might be in a pyramid scheme.

Southwick: Another unique aspect of multilevel marketing is that as a salesperson, you recruit more salespeople to be under you or down line, and then you get a commission or cut of their sales. If they recruit people under them, you get a commission or a cut of their sales too. The more people you have under you, the more money you make, which brings us to our next red flags.

Frey: Once you’ve joined, you might be in a pyramid scheme, if there’s an emphasis on recruiting overselling products. See, one of the big money makers for pyramid schemes is recruiting people to buy in to get started, and they often get commissions or paid bonuses based on this fact, like in the horror movie it follows, the only way to survive is to pass the curse onto the next person. This isn’t a great business model.

Southwick: According to the Direct Sales Association, 75% of multilevel marketing representatives or salespeople are women and often stay-at-home moms, who are enticed to join because of the promise of being able to make a ton of money on your own time after you’ve put the kids to bed. As Casey Bond writing for The Huffington Post puts it, these MLMs encourage women to market heavily to their existing social networks under the guise of female empowerment. You’re encouraged to create a sense of FOMO by showing off that empowerment and wealth, and on social media in order to drive new recruits using hashtags like boss babe, or CEO, or entrepreneur. You thought that Hans were a nomadic people of Central Asia? But Hans are now a derogatory term for aggressive women trying to recruit you into their downline with cheaper DMs like, “Hey, hun. I have an amazing opportunity to share with you”, which brings us to another red flag.

Frey: If you’re pressured to attend an event before being hired, that can be a canary in the coal mine for pyramid schemes. They put on these events for one simple reason. They work. They hype up the crowd with stories of wealth and success, and often bring in big-name speakers to draw attention and they want to give you a taste of this fancy lifestyle. But they’re often a little shaky on the details. You might walk away feeling good. But you have no idea what it is you’re actually supposed to do. A lot of people claiming to make millions actually do so by selling materials on how to make millions, not through the actual products themselves.

Southwick: Some people will argue that all multilevel marketing companies are scams. If you were to ask the FTC, they’d probably tell you that they don’t love an MLM. But they do draw a line between legally operating multilevel marketing companies and pyramid schemes. Legal or no, making money selling for an MLM is not easy. The key is to begin at the top of the pyramid, which is rarified air. The Consumer Awareness Institute, whose research has been touted by the FTC, they found that 99% of people who participate in an MLM lose money. AARP is more generous and they estimate that 75% of people lose money. Of the…

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