The allure of ponzi schemes

There is one known flaw of the human race: we don’t learn from our mistakes.

Like a moth to a flame, we keep going back and falling for the same or similar things.

I decided to write this article due to a sense of urgency this topic necessitates, particularly in view of current economic realities in Nigeria.

You may have heard the term Ponzi scheme or some variation of the term. Investopedia defines this “as a fraudulent investing scam promising high rates of return with little risk to investors”.

It is also referred to as an “investment” option where income paid to initial investors are from monies received from later investors. This pace is usually unsustainable and at some point, there isn’t enough to pay the expected returns to new investors. Invariably, the bubble bursts leaving in its wake devastation, stolen dreams and unimaginable financial loss.

In simple terms, investors are lured by the promise of highly attractive (and many times unbelievable) returns. Interestingly, the name Ponzi was coined from one of the first schemers, Charles Ponzi who promised 50% return on investments after 90days in the 1920s.

His investors later lost an estimated $20million (over $225m (N70Bn) adjusted for inflation) and led to the collapse of six banks. Amazing!!

Somehow, in our subconscious, we know such statements on investment returns are unbelievably ludicrous, yet, we go in. May be faith or just a feeling that this time it might work. Whatever it may be, I believe it’s time we discussed what fuels our desires.

What fuels our desire?

1. Desperation

‘Desperate times call for desperate measures’, a popular phrase ascribed to the ancient Greek Physician, Hippocrates, may have now been resuscitated in today’s Nigeria where the recession has hit hard and almost everyone is feeling the pinch.

There is always the danger of doing things without thinking when we are distressed. What is your situation? What have you chosen to do that you know to be wrong or unjustifiable?

2. Greed

An inordinate desire as old as time. Greed has led to the downfall and destruction of many great people in our history. Even today, Nigeria is barely surviving under the heavy burden of greed and corruption. We denounce this trait in others but seem to exhibit it in droves and spades.

3. Not having a value system

“A man who stands for nothing will fall for anything” Malcolm X

We talk about our values, principles and the things we stand for but do we really believe these things and act it out? It may seem nice to say you are a man of integrity and exhibit self-control but is that really the case?

4. No Research

Going headlong into something without understanding the basics is usually our default setting. I know I have done it countless times and regretted it more often than not. If you ask many victims of Ponzi schemes and other scams they will usually confess to not understanding the product and not asking for more clarification.

5. Lack of Planning

Saying I told you so, would not only be crass, unnecessary but also unhelpful. The fact remains that planning while important is not always feasible. There is a limit to how much you can plan, sometimes life just throws ‘heavy’ stones that make a piecemeal of your plans and finances. In those times, you feel like you’re back to base (with noticeable war wounds). That’s a horrible feeling and I’m sure no one wants to be there.

However, having a plan is still better than not having one. Imagine meeting a recession with no plan, no savings and money for the rainy day. You are definitely worse off (below sea level) and will have a mighty swim back aground.

What you need to do?

If we know what makes us tick, I believe it will definitely be useful to work out how to avoid these scams and ‘fantastically’ risky deals.

1. Do your Research

There is one well known characteristic of Ponzi schemes which is the fact that the investment strategies are usually vague, no clear sense of where or what the money is going to or income coming from.

Which means you need to ask the ‘right’ questions and when there are no answers or they don’t make any sense, run. Literally.  The operator may claim they are being evasive because they don’t want their competition to obtain their investment strategies. That’s hogwash. There has to be clarity in what they are doing. After all, there is nothing new under the sun.

2. If it sounds too good to be true, it probably is

I do agree this is not always clear cut. There is the Bernie Madoff Ponzi Scheme, which is perhaps remembered as the largest fraudulent scheme in the history of the United States. For many years, Mr. Madoff operated a concocted investment vehicle with the life savings of thousands of investors. It seemed professional and genuine but we now know it wasn’t.

But let’s bring it back home, remember the Nospecto Oil and Gas saga. A wonder bank that allegedly defrauded over 13,000 guileless and possibly greedy investors. It really did seem too good to be true, prospects of huge returns over a period of time.

3. Avoid the Herd Mentality

Making decisions because it’s what everyone else is doing won’t get you very far.  A high level of independent thought is necessary to guide you. This doesn’t mean you shouldn’t ask for another’s opinion but rather that your guiding principle shouldn’t be based on what people you know are doing.

Basically, your decisions should be tied to your values.

4. Stick to your Value System

When you know and understand who you are, it is more difficult to be swayed by what people say or things happening around you. Of course, I have said this on the expectation that you know yourself and what you stand for. If you don’t, this is the time to do so. You can read this post on knowing who you are.

5. Consider your Worst Case Scenario

What’s the worst that could happen if you invested in the ‘great’ scheme and lost all of it? That’s an important question to ask if you still insist on investing.

In closing

Right now, there are many new and questionable “investments” out there. For many of us, we are not sure if these are the right places to put our hard earned money.

Remember to ask the right questions and walk away if you are not happy with the answers.  Don’t let pressure from those around you and yourself (a need to make money quickly) cause you do what you are not comfortable with. It is your money, you have the right to decide how you use it and don’t need any unnecessary heart ache.

What is your story? Have you considered going into any of these scam investments or are you already in one? I hope this article reminds you of the need to be cautious in what you choose to invest in.

Ava Oparadike