Of late there has been a lot of focus on Charles Ponzi. It seems he is more well known than Mahatma Gandhi based on the internet queries and hits for him. Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, commonly known as Charles Ponzi, was an Italian businessman and con artist in the U.S.A in the early 20th century. He became famous in North America in the early 1920s as a swindler for his money making schemes. Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. In reality, Ponzi was paying early investors using the investments of later investors. This type of recycling of money scheme is now known around the world as a “Ponzi scheme”. These schemes are floated across the world and “make a Charlie” out of all gullible fools. I have deliberately used the word fool instead of investors, because the schemers use the human tendency of ‘greed’ to make profits and when it comes to greed, none of us is untouched. Some of us just understand that making money is not an easy thing, and if it looks too good to be true then more often than not that may be the case.
Charles Ponzi was a good student of human psychology as all con artists are and he understood that human beings are greedy. They can be influenced easily by authority, social proof, commitment and consistency. Recently, Sharadha Group used this human folly to fool people.
I have come across a number of armed forces officers who are otherwise very worldly wise making the stupidest of mistakes when it comes to personal finances. The most common ones are greed driven. Some of them which I can remember off hand are – Hoffland Leasing and Finance Co, Anubhav Plantations, StockGuru, Gold Coin Schemes, Emu Farms, Goat Farms etc.
In 1992, Anubhav Plantations Ltd. (Anubhav) was floated as a public limited company. Over the years, the Anubhav umbrella expanded to include various others. These companies were backed by a nationwide infrastructure of 91 offices and over 1,800 employees. Investors were promised returns in excess of 24% and secured through ownership of teak trees. Investors flocked including retired army officers like my father-in-law. On 2nd December 1998, thousands of people from places like Shimla, Trichy, Sangli and several other Indian cities and towns converged at the New Woodlands Hotel in Chennai. All of them were investors in the collapsed Anubhav group’s teak plantation schemes, and a majority of them were on the brink of bankruptcy. C. Natesan, Chairman, Anubhav Group had already gone underground. The Anubhav group of companies was eventually found to have duped investors of over Rs.400 crores through an elaborate Ponzi scheme.
The news item in the national newspapers of 7th may 1998 carried a news like this, “In yet another case of cheating the public, the Delhi police has arrested the Chairman and Managing Director, Deen Bandhu Sharma of Hoffland Finance, for allegedly defrauding investors of over Rs 80 crore. Deputy Commissioner of Police (crime) said Sharma was arrested after a complaint was filed by a retired major general, who was cheated of Rs 6 lakh.” Hoffland had started wooing investors by offering a whopping 27 per cent interest by floating a new company called Invest Card and a lot of people were initially paid through post dated cheques and then the payments stopped and cheques bounced. End of story. All money vanished. Ask officers who retired in 1990s, you will find in your family victims of Hoffland.
In 2006, M.S. Guru, hailing from Perundurai, founded Susi Emu Farms and introduced a buy-back scheme that promised lucrative returns on investment in contract emu farming. For an initial investment of Rs. 1.5 lakh, he promised a return of Rs. 3.34 lakhs within two years. Word quickly spread of the dependability of the promised returns, and an advertising campaign headlined by popular Indian film stars quickly made Susi a household name. The operation soon spread throughout India, gaining thousands of investors. When the scheme collapsed, total losses were estimated to be as high as $50 million.
Citizens of the Jammu and Kashmir province, were last month advised by SEBI to steer clear of the Sheep Husbandry Department(SHD), a private company which is advertising 2 to 3% monthly returns from an investment in goat-rearing farms.
All these cases show greed and mob mentality as the prime movers. Please remember my three point Ready Reckoner to avoid losing your hard earned money:-
- Anybody promising you a rate of return more than 18% per annum is to be stayed away from. In the real world the risk free rate of return is 8% adding a premium of 100% for a risk, which an intelligent investor can take, brings us to 16% add 2% premium for your greed and that brings me to the magic figure of 18%. Even from stocks and real estate I do not expect more than 18% returns per annum. No business is able to sustain more than 18% net profit continuously over long periods of time. Check the profits of top MNCs like HUL, Nestle, Reliance, Tata Steel etc.
- Do not listen to your Boss or his friend or your batchmate who has found this one of a kind scheme to grow exotic tulips and then sell it to the Dutch for a 300% premium. And as proof he would show that he has been getting monthly payments for last six months. Let him make 50% every year. Be content with your 15-18%. His becoming richer does not make you poorer.
- Read the book “Extraordinary Popular Delusions and Madness of Crowds” by Charles Mackay which I advise people as the first book to be read before starting personal investments of any kind in any field. It will tell you that there is no age or intelligence bar for becoming a “chu”.
- Returns of more than 24% after deducting all costs and taxes can only be generated by scamsters, swindlers, smugglers and smooth operators. Shun them.