PONZI FOR DUMMIES
All I hear about these days from financial pundits are warnings of Financial Armageddon. Cries and bellows of “Credit Tsunami!” and “Global Economic Collapse!” litter the business landscape. It’s enough to make a person think about alchemicing gold.
I don’t know who to believe, so I’ve decided to get back to the basics. In doing so I’ve discovered an oft overlooked and as of late much maligned investment strategy called the Ponzi scheme.
I don’t see what all the fuss is about Ponzi schemes. If we take the word “scheme” away (which I will henceforth do here) the term “Ponzi” becomes quite benign. Its biggest problem is that its namesake, Charles Ponzi, evidently swindled a bunch of people in a scam involving stamps—probably S and H Green Stamps. People will stop at nothing to get a free toaster….
Ponzis have developed troublesome reputations because they provide returns to initial investors from contributions tendered by successive investors. Everyone is up and arms about this and acts like it was contrived from the depths of Sheol. But there is nothing new under the sun. For decades this investment strategy has worked handsomely for the Social Security Administration.
A successful Ponzi, like any investment worth its salt, is a function of proper timing. Neophyte Ponzi investors often miss this critical fact. They hear stories of third, fourth, seventh and so on level investors who came to the Ponzi after the well had gone dry. So they sit around wringing their hands when they could’ve already been in-and-out, down the road perusing the next Ponzi prospectus.
But unfortunately not everyone is as savvy and enlightened as me. The SEC (short for Southeastern Conference) has issued a white paper on Ponzis and urges investors to consider various “red flags.” They create unwarranted panic by asking questions such as these:
1. Does the investment guarantee certain returns?
Actually, the lack of an offer of a guarantee does not ensure you are not being bilked or swindled. If a prospectus would actually guarantee me a loss, I might not doubt the veracity of its money managers’ claims, perhaps forwarding to them even my very last dime. Honesty from a money manager is my top priority.
2. Do you understand the investment?
Implicit in this statement from the Southeastern Conference is that such investments, if not understood, should be avoided. But if we followed this advice religiously, who in the world would own life insurance? Speaking of which, it is only a deluded Ponzi investor that would, as the last man in the world standing, expect to collect on that double indemnity.
3. Is the seller registered?
I assume the SEC is talking about being a registered securities dealer. But even Bernie Madoff, the mother of all Ponzis, was “registered” when he “Made-Off” with billions.
Don’t listen to the naysayers like the Southeastern Conference. Follow me. Together we’ll be Positively Ponzi. Better come quickly, though. Before you know it, I’ll be long gone.