In 1918 Charles Ponzi started something would forever be remembered in history as the Ponzi scheme. He convinced supposed investors to pay money into his scheme which offered very high returns. Ponzi would then pay out promised returns to investors but unbeknownst to them Ponzi was using money from investors who were entering the scheme to pay out those super high returns. In August 1920 Charles Ponzi was arrested. Listening to the description of the scheme you might have thought of a similar scheme you’ve come across. 100 years later the schemes still operate in varying forms and especially in our part of the world they have become a scourge. So how do you Identify and stay out of Ponzi schemes?

Characteristics of a Ponzi scheme

Not all Ponzi type schemes will have all these characteristics nor will they be easily apparent. The schemers will, of course, make the best efforts to conceal the true nature of what they are doing. That said any of these signs should serve as a warning as to the nature of the investment that is being sold to you.

Abnormally high returns

This one has to be approached with caution in our economy, what exactly are abnormally high returns. In South Africa, for comparison’s sake a Ponzi scheme is defined as offering 50% per month or higher. Doesn’t sound like so much in our economy where inflation averages close to 20% per month. It is in fact very difficult to give a clear guideline but you can apply the “if it sounds too good to be true it is” methodology. Compare to other similar or competing investments to get an idea.

Guaranteed and/or consistent returns

The only guarantees in life are death and taxes said someone much smarter than me. Where an investment opportunity offers you guaranteed 20% per week make it your business to understand how they can guarantee this. The returns in these schemes are also very consistent, being offered like clockwork. No boom or bust cycles, no seasonality just consistent returns.

Pressure to get in

I really would’ve put this at the top of the list as it serves as the number one sign for me. Where you feel extreme pressure from recruiters whether they be friends or family to join be wary. Often times it is by design that the schemes use current participants perhaps unknowingly to lure others into the scheme. Take your time and be sure to be satisfied before signing up.

Vague business model

Anybody asking you for any sort of money should be able to furnish you with details of how the returns will be achieved. Time and time again I’ve seen many schemes of this nature that fail on this basis. But not all schemes do, for example, the cryptocurrency trading based ones. Cryptocurrency because of its complexity has become a favoured mask for such schemes. However, if you understand that cryptocurrency in itself has no underlying asset you will see through the schemes. As George Clason taught us in The Richest Man in Babylon, do not invest in things you do not understand.

Need for more investors

Generally real investment projects have solid targets which are time-bound. Targets such as “when we have 10 people” or “as soon as possible” do not bode well. An investment that is well set up and running will likely not require additional investors to join at a time of their choosing. So that fabulous investment that is working shouldn’t really have room for you. This coupled with the pressure to join should sound the alarms in your head.

Pressure to reinvest

This has advanced over time. While you may not receive direct application of pressure to reinvest the infamous Triple M used their high returns to encourage reinvestment. With Triple M no money was ever made, they simply used money from those buying-in to payout those expecting returns. The system used would continue to show your money growing and greed would manipulate people into reinvesting for growth. Until it collapsed. Understand the payout terms of investments and make sure there is no undue pressure to reinvest.

Tread carefully, the schemes continue to morph with time and new tactics are employed to dupe unsuspecting people of their hard-earned money. There is the old principle of the Spanish Prisoner or Nigerian Prince who has a fortune to share with you if you would only use a seemingly small amount of money to help release the fortune. The tactics change but the story remains the same.