- Published on Tuesday, 28 August 2012 02:49
- Written by Sagjit Singh
- Hits: 1186
THERE is a very thin line existing between what we call ‘GREED’ and on other side one’s ‘AMBITION’ to attain richness. We all know that greed is a negative connotation, while ambition is the positive one.
So in our day to-day pursuit of earning money often it may happen that one has crossed the red line and knowingly or unknowingly got moved from the boundary of ambition to the dangerous territory of greed. Why am I calling greed as a dangerous territory? Before we understand this, let us first confront as to what we mean by a ‘Ponzi Scheme’.
In simple terms a “Ponzi scheme” is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.
The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.
Perpetuation of the high returns requires an everincreasing flow of money from new investors to keep the scheme going. So there comes a great temptation to earn abnormally high returns with a Ponzi scheme. How does it operate on the ground? It is simple to understand but difficult to control one’s temptation to join a Ponzi scheme.
Assume you have got your year end bonus worth Tzs. 20 million and thus looking for an ideal investment opportunity which can maximise your returns. Let me put the records straight by stating that you as an investor is within your rights to aspire for maximization of your investment returns.
There is nothing wrong in looking for an investment opportunity which comparably can deliver better returns. But there always has to be a reference ‘benchmark’ which represents the overall market conditions. For example, if the prevailing returns in the market are hovering around 10-15% p.a, one must always look for an investment opportunity which over a period of time can generate the best of returns when compared to the benchmark or can even outperform the market slightly.
The problem comes when you start aspiring to get abnormally high returns which are nowhere near the market representative returns. As stated above, if the prevailing market returns are around 10-15% p.a. and then suddenly you come across an investment opportunity (although it is wrong to call a Ponzi scheme an investment opportunity), which promises to generate returns say @ 30% p.a..
Should you jump to grab this opportunity or pause to think rationally as to how it is feasible to get such abnormally high returns when the benchmark market returns are far lower than what the so- called Ponzi scheme is promising? This is what the ‘greatest temptation’ I was referring to when you have read the subject matter of our today’s topic in the beginning.
Please beware that initially the Ponzi scheme operator will pay out high returns to attract more investors, and to lure current investors into putting in additional money. Other investors begin to participate, leading to a cascade effect. The “return” to the initial investors is paid out of the investments of new entrants, and not out of profits.
Often the high returns lead investors to leave their money in the scheme, leading the Ponzi scheme operator not to have to pay out very much to investors; they simply have to send statements to investors showing them how much they earned. This maintains the deception that the scheme is a fund with high returns.
What is the end result of a typical Ponzi scheme? It is known but painful to those investors who at the first place could not control their temptation of earning abnormally high returns and now glaring at the risk of losing their entire capital investment altogether. Sooner or later the scheme will fall apart due to one or other reasons as stated hereunder:
The most infamous reason is when one discovers that the Ponzi scheme operator has suddenly vanished taking all the remaining investment money (minus payouts to investors already made – if any). There is no way a Ponzi scheme can operate endlessly because the promised returns are not sustainable. The other reason for a Ponzi scheme to stop is when the Regulator has discovered it and puts a break on its operations.
Normally by the time a Regulator intervenes, it is too late and majority of money from the scheme has already been siphoned off by the operator. Anyhow whatever the case may be, the end loser in this entire game is always the poor investor who in his quest to earn quick money has ended up losing the entire investment – what to talk of the promised returns.
What lessons can we derive out of it? The lesson is loud and clear – control your greed leading to temptation of earning the abnormally high investment returns. Finally let me conclude by sharing a famous quote that – “there is no calamity greater than lavish desires, there is no greater guilt than discontent, and there is no greater disaster than GREED.” Cheers!