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'Ponzi' scams or 'Pyramid Schemes'

At one of my recent seminars, I was asked about "Ponzi" scams or what you might call "pyramid schemes". No surprise, really, considering the stories about an alleged fraud in which many prominent people, including top business personalities, are reported to have lost millions, if not billions of Dollars.

 

I told my students about a gentleman I met about two years ago at one of my wealth building seminars in the US. His girlfriend was with him and she was taking plenty of notes, but he was writing nothing. I was curious, so I asked him if he was not interested. He told me that basically he could make quicker money way better than me: my investment advice would bring a reliable return of around 8 percent after taxes, but he could easily, and regularly, get 20 to 30%.

 

I've studied the markets and that sort of return is not sustainable. So I told him that. But he just smiled and said he had a much more advanced system. I didn't find it wise to further challenge him so I said good luck and moved on.

 

Earlier this year, I met him after a function in the North Western US. He was a lot less inflated and certain. He told me why he had been making those sort of returns: he was involved in what turned out to be one of the biggest Ponzi scams in history - that of American financier Bernie Madoff. He took a US$9 million loss.

 

Why do people get taken like that?

 

They get blinded when they think they are going to get pleasure (or financial profit) without pain (financial risk). They fantasise and they dream unrealistic dreams. They imagine themselves having the pleasures that they believe money can bring. They're addicted to the dopamine high they get from pleasure.

 

And people are especially vulnerable to these sorts of fantasies when they feel they're not getting what they want; that their wealth is not growing as it should. I'm told, many of the people taken in by pyramid schemes are just such vulnerable people: those who have been retrenched and see their financial security disappearing and who are prepared to gamble their severance packages.

 

When there is blood in the water, the sharks circle.

 

I was asked why is it that intelligent people fall for this. Surely they know: If it seems too good to be true, it is. The reality is that intelligent people don't get duped by these tricksters. Intelligent people do their homework: they check out the offer, the people behind it, the downsides. Emotional people get conned. They see only the fantasy and are blinded to the downside.

 

This is what I teach: there is no magic formula or silver bullet which will bring you wealth. It is about having a sound, careful strategy - and disciplined work.

 

And the hardest work of all is to realise that you need to save and then invest - whether as an individual or a business - to build your wealth and to provide yourself with a cushion against the so-called bad times. Once the cushion is there, you have earned the right to take greater risks - but only sensible risks that don't put your already-established base in danger.

 

You must also realise that fantastic returns are the exception, not the rule, in the markets and that the average growth over decades is only around 8 percent.

 

Remember, in investing, in dealing with money, as in life in general, that when you only see benefits without any drawbacks, you are living in a fantasy.

 

Learn to see both sides of any money issue - any issue in life, really - and you won't easily fall victim to any con-man

 
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