I have always held that to accumulate decent money, keeping away from danger is very, very important. Regularly we find investors losing money to some glib talker and they part with big amounts of money. Big has to be contextual of course – a maid servant losing Rs. 84,000 is as bad as a senior executive losing Rs. 8,50,000 or a businessman losing Rs. 55,00,000!

The SEC in the USA regularly publishes stories about ponzi schemes where people are collectively defrauded of amounts ranging from a few million to 2-3 billion. Go to their website and do have a look. IN the Indian context I know retirees who lost money in chit fund schemes in West Bengal and those who lost money in Jignesh Shah’s commodity funding schemes.

How do you protect yourself? and of course your Retirement corpus from such fraudsters?

The term comes from Charles Ponzi, who in ’20s stole from fellow Italian immigrants. But his swindle earned peanuts compared to some of the current day fraudsters. From Shapiro’s alleged scam to Allen Stanford’s $7 billion to Bernie’s Madoff’s all-time $65 billion topper, Ponzis come in many shapes, currencies and sizes now.

More frauds will come to light as bull markets mature, interest rates in banks fall, and desperate and greedy investors seek higher returns. These frauds remain undetected in a bull market and come out only when the market crashes – or at least enters a bear phase. Ponziers pay phony “returns” to their earlier investors! Obviously the funding for this comes from the newer ‘prey’ aka investors who are happy to take some money off the market.

Protecting yourself means knowing/ learning the signs that an “investment” is actually a Ponzi scheme.

The con artist takes “custody” of your money. The claimed past returns are unrealistically high and consistent, maybe between 18-22% every single year. The con artist’s “strategy” is complicated and jargon-packed, using endless terms normal people cannot understand. They get a low end bank employee or a temple trust employee and rope him/her as an early client. Then they give the assured return to that person for a few months.

At this stage they pressurize him into “do you not want your friends and relatives to have the good fortune that you have had”…so this man either becomes an agent with a commission or just a free goodwill ambassador in that community. A banker or a temple employee can get a lot of referrals!! Bernie Madoff used this scheme extremely well.

Excellent years only! 

Most of these conmen show you a 18% consistent year. They try to tell you it is like PPF – except that it has a better return. So what can be better? an assured 8% pa or an assured 18% pa? Please do remember there cannot be any instrument that can give 2x the inflation and have a standard deviation of 1. To get higher returns you need to take higher volatility along! In 2017 mid caps gave 79% return in one fund. I can assure you that this will not be repeated anytime soon. It will catch up with the mean.

Jargon

Investments should always be explained in a simple way so that you can understand (do I need to say it has to be elucidated well so that you can fathom?). Showing off one’s language or communication skills is a scary thing. One of the famous Khans of the film industry met 2 representatives trying to sell an endowment plan. After listening to them for some time he said “I cannot understand this product, SO I DO NOT WANT IT”. I do not wish to elaborate more, but if he can do it, so can you. Do not invest in products that you cannot understand.

Most people I know would have done much better if they had kept their money in an index fund instead of looking for schemes like Madoff.

References

I know of some professors of a college who have recently been attracted to a ‘Wealth’ management firm which has slowly started skimming them. Aggressively asking for references works well with people with limited understanding. Professors of math, stats, chemistry can easily be asked to do a ‘sip’ in ‘ulip’ – after all so much is being said about ‘mf sahi hai’ and ‘sip cannot lose money for you’. I have met some professors – and I know they will be in pain. As an outsider / consultant / friend any attempt is seen with suspicion. Frankly I have no stake in their gains or losses. One of them ASKED me after she had invested Rs. 55 lakhs. God bless.

Do not be carried away by references by people who do not understand investments. Of course if their title is ‘Head of finance – A big group’ be more careful!!