How To Protect Yourself From A Ponzi Scheme?

#This is our exclusive Asia-In-Focus Monthly Report for our email subscribers. This report was first published on the 30th April 2017.

Asia-In-Focus

April 2017 Edition

How To Protect Yourself From A Ponzi Scheme?

There has always been a gray thin line between what is investing and what is speculating. The terms have been used so interchangeably even by many investment professionals. So much so to the point that most people just refer to both activities as the same thing.

Yet, the truth is investing, REAL investing, is so far apart from the word speculating. One of the biggest news this month in Malaysia and Singapore has yet again, tested the true meaning of these two terms.

In recent days, one of the largest “Investment firm” in Malaysia, known as JJPTR, is starting to show signs of collapsing. The company has claimed the losses, running over hundreds of millions, are due to its account being hacked. Regardless of what the true story is, let’s us investigate if the “investment” scheme is sustainable in the first place.

How does JJPTR work?

According to news reports, “investors” can “invest” from as little as US$25 to a maximum of US$1,000 per “investment”. The investor can then expect a minimum return of 20% a MONTH for the investment. The firm claims to be a forex trading company.

If that is the case, let us do a rough calculation. If a person invests US$1,000, he can expect to get back as least US$2,400 by the end of the year. That is a return of 140% from his investment a year. If he can reinvest the total amount every year, that would be great news! Because with an initial investment of just US$1,000, he will become a millionaire (in USD nonetheless) in slightly less than 8 years. That is just where the fun starts! Due to the power of compounding, if he continues to invest his US$1 million into the scheme, he will become a billionaire in another 8 years’ time!

Let not forget that is just the return for the passive investor. What about the founder of the company. In order to generate that type of return for his investor, wouldn’t he need to generate returns at a much higher rate? Let’s assume he uses his ultra-complex forex trading algorithm that we layman can never even aspire to understand. He might be able to generate a return of about 280% a year. With just a starting capital of US$10,000. He will be a billionaire in about 8 years, 7 months, 6 days and 2 hours!

The last I checked, I have yet to see a forex trader on the Forbes Billionaire list.

I think the source of the problem is that many of us do not know what is the range of acceptable and reasonable return on an investment.
I would like to use this letter to clarify that very problem for you.

What Are The Returns Of The Super Investors?

  1. The world richest and most famous investor is none other than Warren Buffett. And from 1965 to 2015, his company, Berkshire Hathaway Inc, has been able to generate an annualised return of about 20.8% a YEAR for the past 50 years.
  2. George Soros, one of the best performing hedge fund manager has returned about 20% a YEAR in his flagship Quantum Fund from 1969 to 2011.
  3. The three great investors in Asia as highlighted in our post here, generated about 15% to 17% a YEAR for the past 20 years.

So, if we compare the huge differences between what some of the best investors in the world had achieved in the past few decades, with what the claims these “investment” schemes are offering, it just does not make logical sense.

Thus, as investors, we should adjust our expectations when we start to invest our money. If the real professionals who dedicated their lives to investing are only able to achieve about 20% a year in return, how much should we (part-time investors) hope to generate?

Schemes like what JJPTR is doing are commonly known as Ponzi Schemes. All of these schemes typically work in a similar manner, regardless of what the underlying mode of “investment” might be. It can be forex today, it was gold in the past. I have come across schemes that invest in land in Canada, development in China, in oil wells in Africa, in art, in wine and even digital currency. The truth of the matter is, all that is happening behind the scene is the simple passing of money from the third investors back to the second investor back to the first investor. This is NOT a real investment. It is simply wealth distribution.

Sadly though, Ponzi Schemes are not going away. They have been appearing on news since the 1920s. The best way to protect ourselves and our family against falling trap to these schemes are simply educating ourselves.To protect against them, you only need to know 3 things.

  1. Know how to calculate a yearly rate of return.
  2. Know how much the best investors are making, ie 20% max A YEAR
  3. Have a reasonable and logical expectation on the return of your investment.

Till we meet again next month. I wish you great health.

Your Truly

Stanley Lim
Chief Editor

Stanley Lim, CFA

Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer for the upcoming investment book: “Value Investing In Asia”, scheduled to be published late 2017. Stanley is currently the chief editor of Value Invest Asia.

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