I remember when I was young and some of my friends told me stories of how powerful their parents were. Some would come to school and tell a litany of lies about their parents. Notable among those were stories around their father owning some big factory, their mom working as special assistant to the Minister of Agriculture and their uncles trekking America like no one’s business.
In the midst of all these stories, we sat on the same table waiting for the food debris from our seniors and neighbours.
There is always a big difference between possibility and reality. The reality is that after working for many hours in the sun, I am more likely to call for water than food immediately. Food is more sustainable after the exertion of energy in the sun. However, you need water to restore your system (body) before the consumption of what I call ‘proper food’.
A possibility may be that tomorrow the moment you get to the office a nicely pressed letter of promotion will be dropped on your desk, when you are not even due for promotion. A familiar possibility for most believers is money dropping from the skies onto their laps, just as in the days of Moses.
However, this possibility will remain as such until such ‘believers’ wake up.
In the field of business and investment, we have these possibilities and realities. So, today I want to touch briefly on some basic errors we make when it comes to investments.
As explained some time ago, the four key indicators that we need to critically assess before any investing decision are safety, return, time-horizon and convertibility.
Out of these indicators, the most important to me is safety of the investment. All over the world, there has been rises and falls of many investing schemes which try to beat the natural progression of returns. These have come to be known as Ponzi-schemes, named after the notorious Charles Ponzi who lured investors with outrageous returns in the 1920s.
History even adds that before Charles Ponzi there was the ‘Ladies Deposit’ by Sarah Howe in Boston, 1880. Howe offered her solely female clientele an 8% monthly interest, and then later stole the money that the women had invested.
This therefore means that these tactics of duping investors are as old as the word itself. However, the question remains are the investors ignorant or greedy?
I am very sure that at the end of this article we will know whether it’s born out of ignorance or greediness!
Running your own business such as a school, hospital, construction or manufacturing company, to mention few, requires capital and the incurring of operational costs. You therefore charge a margin, which becomes the profit (interest) on your investment.
Investing in shares and stocks comes with quarterly or yearly dividends, which serve as your interest (profit).
Investing in fixed deposits and government bills come with readily calculated interest, which is known from the outset.
In all three segments above, one is clear in his or her mind as to how the investing institution will make money to pay their returns. When you invest with a financial institution, you have it at the back of your mind that they will also find someone who needs your money at a higher rate. Your interest will therefore come out of the interest that the one who needs it will pay.
Analysis has therefore been made that when you call for a higher rate from the financial institutions, it’s the companies who need loans from these institutions who suffer most in the long run.
This means you mostly rest assured that your investment is secure; at least as long as that financial institution complies with the regulatory authority.
Now let’s come to the ‘juicy’ investments which go past the above analogy. I must say some may be financial institutions who in the quest to win the market will also resort to unrealistic returns just to lure investors. Some of these institutions take the investments at higher rates with the mindset of going into real estate, which gives good returns to pay-off depositors.
The difficult situation comes when such properties are not sold on time prior to maturity of the investments; hence, making redemption of funds very difficult.
Beyond these financial institutions are the cunning companies who come with funny and eye-catching names. They come with nicely packaged theories of making good returns.
They lead victims to believe that profits are coming from product sales or other means. Notable among them are the commodity markets such as gold, diamond, bauxite, etc.
They always start operation without the necessary regulatory permit, and when they start gaining ground apply to wrong bodies who have no connection with their real-time business.
The too-good-to-be-true schemes will continue to survive on the back of only two factors:
- As long as new investors contribute new funds
- As long as most of the existing investors do not demand full repayment
When they start operation, they start with a low margin above the prevailing market rate. However, with time they increase the returns to attract investors – usually after 1 year of operation. This is the honeymoon period that always serves as a sounding board for how sustainable the business has been.
Such schemes always explain their source of returns with unclear and vague terms – such as hedge futures trading, high-yield investment programmes, offshore investment, sustainable international business, gold collectible investments etc.
How many of these investors even have time to Google the full meaning of these words?
The moment they start increasing their rate exponentially, they then try to fortify their business by bringing on board superstars from across the entertainment industry as brand ambassadors. Sorry if this story sounds familiar!
These ambassadors come in to add more weight to the scheme. In some cases, these stars just take their huge signing-on fees and never really engage themselves in the actual work – aside from their faces on billboards and intermittent appearances at the opening of branches.
This brings them to the next step of having a lot of bloggers and media guys on their payroll to suppress any negative news around the business. These steps can sustain the business for up to ten years in some instances, until the two pointers I mentioned above strike.
The regulatory authorities also step in sometimes to restore sanity in their business, after many months of investigation.
The funny aspect of these schemes is that the operators always try to minimise withdrawals by offering new plans to investors wherein money cannot be withdrawn for a certain period of time for higher returns.
They always start with a legitimate investment vehicle, but fabricate false returns along the line.
Let’s be wise and financially-educated when it comes to investment. Any return that is too good to be true is fake!
If it collapses on you, it will do so on your friend. Let us not encourage it at all when it starts!
Authorities should also be on the look-out for such schemes, and issue quick warning publications.
Anyone who engages them after the publications will then be seen as greedy. Otherwise, we will continue to punish the many who have little or no knowledge when it comes to investment involving the few who are greedy.
A word to the wise is always enough!
Patrick is a chartered banker with over 5 years’ experience in mainstream banking, having worked in various capacities. He is currently at the Branch Manager Position of his institution.
He has also been teaching on Topics Savings, Investment and Financial Independence for over 2 years, and is a research fellow for ILAPI Ghana. He runs a financial channel on Youtube by name ‘Patrick TV Gh’ and has appeared a couple of times on the business segment of TV3 News’ 360.
Patrick is into youth facilitation and counselling. He can be contacted via email@example.com and or 0243984492.
Follow Patrick on the various platforms for more education: