Thursday, April 12, 2007

The Midas Touch

In 1557, an English farmer got into the poetry writing business and published “Five Hundred Points of Good Husbandry.” It was one of the first self-help books and contained many valuable tips that have since been plagiarized by the home making magazines to fill their pages.
But the one precept of his that most people remember, yet fail to follow, is the oft-quoted “A fool and his money are soon parted.”
I first became aware of this human failing when, as a young man, I had my attention drawn to it in myself by my bank manager, but my youthful indiscretions were as nothing compared to the excesses of some mortals. These I discovered when I spent some years in what is usually referred to as the money management business. Here I found another phrase that was apposite: “Hope springs eternal in the human breast.” For so many wish to confound the laws of economics by investing, although the word is hardly appropriate, in enterprises that will produce returns far beyond the dreams of avarice and that are most certainly beyond the realms of commonsense.
Often referred to as High Yield Investment Programmes, HYIP’s, these are now heavily promoted by courtesy of the Internet, where the promoters can distance themselves from the rabble behind a pleasing degree of anonymity, ensuring their safety from the baying crowds when the scheme, named after a certain Mr. Ponzi, goes belly up. Mr. Ponzi, whose success was inhibited by lack of computer technology in his day, was able to promise enormous returns by paying off his early contributors with the funds being received from late comers. Inevitably, at some point, demand exceeds supply and, there being no such thing as perpetual motion, the merry-go-round breaks down.
My first encounter with such schemes came when I was researching a book on the fraudulent First International Bank of Grenada. Here the claims were of generating a modest 100% plus return for the lucky subscribers, most of whom lost their entire investment.
But FIBG were too modest, for my next book was on the subject of an investment plan that would produce 2% per trading day – or so the sponsors claimed. Clearly Warren Buffet, whose best years had produced a miserable 35% or so needed to brush up his ideas.
Unfortunately, as it was with Mr. Ponzi’s scheme, the modus operandi was the same – there were no investments and the money came from the other suckers.
Google HYIP and you will come up with a hundred and more similar “opportunities,” some of which will offer more than 2% per day return, tactfully declining to provide any details of their methods and certainly not offering anything in the way of audited accounts. The naivety of thinking that an anonymous creator of a website can miraculously outperform professional investment managers is staggering.
Thomas Tusser was right. And he proved his point, since in his will he was found to be the owner of a reasonably substantial land holding, although probably not bringing him 2% per day.

“One Big Fib,” the story of the fraudulent First International Bank of Grenada and “Just Numbers on a Screen,” the rise and fall of the Pure Investor (PIPS) investment programme, are both available from Amazon, Barnes & Noble etc.

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Blogger Nej said...

The trial date of PIPS has been set for September... hopefully we'll see some justice done!

11:57 am  

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