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Morris Mpala, MoB Capital
PYRAMID schemes are based on members recruiting other members to join in. The more members there are the more returns are generated for initial members. More money is made by generating more members through new recruits by existing members.

Ponzi schemes start off as legitimate investment vehicles but offer unsustainable returns that eventually become fraudulent as they try to maintain the higher returns to initial investors.

Pyramid schemes are a concept where one pays future returns on investors by bringing in new investors. This concept of investing is not sustainable as failure to get more depositors means the initial depositors will not be able to get their returns as it were and eventually leads to the collapse of such investment schemes.

Some have labeled these Ponzi scheme as made famous by the gentleman of the same name that first ran such investment vehicles. In theory if you continue to have more investors this would be sustainable but we will all know that isn’t possible.

That is the same reason why some Ponzi schemes take longer to collapse than others .Some people are better at selling the dream than others or keep on reinventing the dream to investors until one day when the chickens come home to roost.

In life though the same principle seems to apply everywhere the only difference being either one is legally operating so or not. When you look at life in general everything is a ponzi scheme. To begin with the earlier generations had it easy or had generally a good life than now.

So those that came later didn’t get as much benefits as the earlier generation.

The stock market is another example depending on when you purchase your stock it might not be as rosy as people will project it to be.

When you delay to buy a rising stock you will end up not making money. Rising stock has value all things being equal.

Those that don’t time right might end up buying the stock when it has peaked and that’s take long to make a return on their investment.

From this angle we call the stock market a legalized Ponzi scheme. It’s a legal gambling ground not different from the illegal Ponzi schemes the concept is the same. Late comers always eat bones.

Housing market is the same as well. Those that buy after the boom tend to lose out or wait longer to get a return on their investment. So timing is vital in these investment vehicles. Like in a Ponzi scheme if you were the first guys to get into the illegal scheme you benefit immensely but thereafter its all losses galore. Like now people are sitting on non performing housing investments after the mortgage crisis.

What is the difference between mortgage crisis and the Ponzi scheme nothing besides the rule of law? One is legit the other not so legit but ideology the same: you have to time your investments.

Unemployment is on the rise. The earlier graduates got the jobs that they wished for. Current university graduates have to scrounge for jobs or settle for what they didn’t train for as a compromise because the job market is no longer lucrative.

The reason you go to school is not just to be trainable but its a promise that you will get employment and when you don’t isn’t that the same as a Ponzi scheme just because you came late on the job market therefore your options are now limited. Why send me to school to learn at a premium but you can’t get me employment? The unfortunate part is that I don’t know to whom that question is supposed to be directed to for an honest answer.

We look at the social business partnership transaction otherwise called marriage. Just like in a marriage when you go in with high expectations and those expectations somehow are not met you will reconsider your position but the damage has already been done.

Pulling out becomes an option or you might want to hang in there and see if fortunes change so that you benefit from investing your heart with someone else. The same dilemmas faces Ponzi scheme investors should they pull out or wait a little bit longer in the hope that other depositors will come through so that they also reap the rewards of being in the scheme.

In the areas of businesses those that started the IT craze reaped huge rewards but look at those that jumped onto the bandwagon later on all they got were crumbs and eventually ended up closing shop because they could not sustain their operations. Where is the difference between my backyard Ponzi and this?

A piece of land will always give you better yields in the earlier stages of using the land thereafter you need extra investment to get better yields. Otherwise if nothing is done the yields keeping on getting smaller and smaller until it becomes barren land which is tantamount to a Ponzi collapsing if no extra new investors are sort.

Earlier money was more valued than now. Old money had more buying power than new money. Inflation has just ravaged the buying power of money. The money you had in the 90’s bought more than what it is buying now. You now need more effort to make the same money that you made easily in the earlier days.

The whole life process from a lighter side of things is just but one big Ponzi scheme that is why you always hear people say they don’t make them like that anymore. In terms of the losing side of things a Ponzi scheme is the same as all other investments the difference is it is illegal all other investments are protected at law. By the way life is also an investment as you invest in living. And you can choose to invest heavily or just a little bit in your living standards at a risk palatable to you the living owner of your life.

Ponzi or no Ponzi the law is the source of all problems and I don’t think stupidity has something to do with it. . The law is definitely an ass.
Word of Advice

1. Basic rule or golden rule in investing is not to lose money.

2. If it looks too good to be true then it is too good to be true, forget it.

3. Do not be greedy.

4. Manage your risk/return appetite.

5. If not in the know ask experts.

Blessed is the hand that giveth than the one that taketh. Today we advise investors to read on Warren Buffet’s rise in the investing game.

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Morris Mpala is managing director MoB Capital (Pvt) Limited, a microfinance institution offering loans, micro-insurance and advisory services to small to medium enterprises as well as individuals.