The global financial crisis has also revealed how ponzi schemes were used to cheat investors of their monies. Take the Madoff case, for example, he used his connections, influence and charm to convince very wealth individuals, funds and even charities to invest their monies for what looked like super-normal investment returns year-in, year-out.

Even in Singapore, the man behind Sunshine Empire – a multi-level marketing scheme that is allegedly a ponzi scheme – is being charged in court for allegedly running a fradulent business and criminal breach of trust.

According to Deputy Public Prosecutor April Phang, the revenue generated by Sunshine, which has a paid-up capital of $150,000, between August 2006 and November 2007 totalled $189 million.

Their alleged Ponzi scheme attracted as much as $189 million by investors drawn by the returns!

My momma always told me….

My mother is as down-to-earth a person as you can get. She worked hard all her life and even during her retirement years, I thank God for her as she helps out with my daughter as well.

One of the useful advice given by my mother was really to be centred and not go for easy riches. Her words are so true given that my stock portfolio is 50% underwater even though I invested in blue-chip stocks that are in solid, fundamentally strong businesses and were listed on the SGX and regulated.

The fundamentals of investing are to:

[1] NOT LOSE MONEY

[2] REMEMBER RULE NUMBER 1.

Central to rules 1 and 2 are understanding what you invest in and knowing that there is always a risk-return trade-off in any investments. And the more you understand the risk-return trade-offs, the closer you are to keeping within rules 1 and 2.

The Sunshine Empire episode is not the first neither will it be the last. So long as human greed and ignorance abounds, there will be people drawn to it. More cynical friends even remarked that the listed stock exchange can be misused as a form of gambling as market prices may not always reflect underlying value of the assets and business of a company.

If you understand how ponzi scheme works, the proceeds from the investors of the current investors are used to pay the initial investors. The cycle works so long as new investors come in providing for fresh funds which can be used to pay off earlier investors. It’s borrowing from Peter to pay Paul with no real value-creation done.

How to avoid being a victim in a ponzi scheme

The key to avoiding being a victim is to be sceptical. There is no free lunch. This saying means there isn’t many opportunities to make high returns with low risk. In general, the higher returns you desire, the more risk you have to take. The risks could be losing all of your money, could be variability in returns, it could be time period that the money has to be tied up even in legitimate investments.

Another important factor is to know yourself. How ignorant or well-informed you are about the potential risks/returns of any venture, investment or scam. Knowing how susceptible to greed as well as fear to losing out when people are in a frenzy to buy/sell investments is to keep a cool head when the mob goes crazy.

Ultimately, it is about walking away from things you don’t understand even if you’ve done your homework in reading up, asking around and getting trusted advice from professions or people in the relevant industry.

Above all, understand human nature, in that if something is TOO GOOD TO BE TRUE, it usually is.

Have you heard of stories of people being scammed?

Share with Panzer in the comments section.

Be well and prosper.

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