The Clever Investor Part 2 – The Bad

Share on facebook
Share on linkedin
Share on twitter
Share on google
Share on email
In this three part mini series we are focusing on various ways you could invest your money. The Good, the Bad, the Risky aims to unpack investments; looking at the pros and cons, as well as, what's best to focus on. This article is focused on "the Bad" investments.

The Bad Investments

Not all investment opportunities are good or in fact legal. There are some investments that are outright bad. These bad investments are often portrayed as an easy, quick  way to make money without offering much transparency around how returns are generated.

Bad investments are very often scams and are run by smart, convincing opportunists who seek to make money off the gullible public. Through false promises and exclusivity, these scammers lure you into a trap that seldom ends in mutual happiness. 

Although we believe no one would invest in a bad investments many of us get caught out by the allure of easy money. Below is some information and insight into some examples of bad investments. Always keep an eye out for the signs and if you are unsure contact an independent specialist like us to help you investigate the opportunity.

Types of Bad Investments

Pyramid Schemes

A multi-tiered, money-making scheme that requires the recruitment of more people to profit.

You may have heard of pyramid schemes before or even know of someone that has been caught in one. Pyramid schemes come in many different forms, each one trying to evolve where others have failed. Very often these schemes are unable to continue to grow as there is a finite number of people they can recruit.

All pyramid schemes have one common characteristic. They all require their investors to recruit other people in order to make a profit.

Many schemes may even use the selling of products as a way to disguise what’s actually going on. A red flag to look out for is when you need to get other people involved to grow your returns, this may seem obvious enough but many of us fall for it. 

These schemes often operate in plain sight and appear to be harmless because of the façade it puts up. They can operate in plain sight for many years as a loyalty scheme. Lyoness is the most recent example of a system that looks very similar to a pyramid scheme. So much like a pyramid scheme that some countries have ruled it as illegal.

A well known example of a pyramid scheme involves the multinational nutrition company Herbalife.

Although the company is still active today as a ‘multi-level marketing company’, they were announced as a pyramid scheme after much evidence was found. The company sells nutritional and weight loss products but is built on a structure that represents a pyramid scheme.

Members buy the products in bulk and then either consume them or sell them to other investors who in turn do the same. Investors don’t really make a profit by buying and selling the products but from bonuses that come from recruiting more people.

The further the investor is from the source of the scheme, the smaller the chance they have of making any profits. According to a study in 2015, Nearly 90% of investors made no money off of commission.

Ponzi Scheme

An illegal investment scheme that promises high returns in a short period with very little risk.

Ponzi Schemes were coined in the early 1900’s when a man by the name of Charles Ponzi began reselling postal stamps for big profits. Eventually, this business venture developed into Ponzi looking for investors for his business.

He would promise investors outrageous returns and then pay off these investors using money from new investors. At the peak of the scheme, Ponzi was earning $250 000 a day before he was caught and charged for fraud.

 

Nowadays, Ponzi schemes still exist but they are harder to identify. These schemes can be disguised in the form of stokvels. Not every stokvel out there is an illegal Ponzi scheme, but there are plenty out there.

The way this works in an example is a person would have to pay an amount (eg. R200) to an investor who will then add them to a list of 10 people. The promise is that when the person gets to the top of the list in a month or two, they will receive R800 back. The investor is using these funds to pay off the earlier investors, unbeknownst to the individual. This can work until the leader or initial investors are unable to recruit or sell to new investors.

Later investors seldom get paid as the scheme falls apart. Stokvels can work to benefits its members but due to the informal structure with no clear rules or regulations the funds could be mismanaged and leave investors with no recourse. 

The flag to a Ponzi scheme is similar to a pyramid in that you are promised exceptional returns without any clear explanation of how the investor achieves these returns.

These investments need to be avoided at all costs, no pros tend to come from this type of investment. More often than not these investments are nothing more than promises. They are often pitched or presented by highly intelligent people with excellent people skills.

These promises often come with phrases like a ‘quick buck’, ‘easy money’, ‘sure thing’, ‘no brainer’, ‘once in a lifetime’ and ‘everyone is doing it’. Other hints to these schemes often include urgent timeframes and cut off times, this forces you to make a quick decision and does not give you time to think.

Often they capitalise on our emotions, optimism or desperation. We need to invest with objectivity and try our best to keep our emotions at bay. This is where an objective independent person can add huge value. Other hints to these schemes often include urgent timeframes and cut off times, this forces you to make a quick decision and does not give you time to think.

A one-liner that can save you much heartache – “If something seems too good to be true, it probably is.”

"If you don’t understand the business model, don’t invest in it" - Warren Buffet

In the above schemes, the investment opportunity can appear legitimate with elaborate documents, branding, websites and contracts with fine print. Very often people are blinded by the flashy lights of false promises and only in hindsight do they realise what has happened and see what.

As mentioned before, if you are ever unsure of an investment speak to a professional.

Look out for our final article in the series where we will be looking at some of the riskier investments options.

Live Trust Grow Matter

The information provided is not intended to address the specific circumstances of an individual and is for information purposes. Should you require financial advice please contact us info@growmatter.co.za

Share on facebook
Share on linkedin
Share on twitter
Share on google
Share on email

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Similar Articles

Matter

Comparing your Cover

Are all insurance companies equal? The simple answer is no. Look at these few providers as an example. Perhaps the better question to ask is why or how are they different?

Read More »