If It Sounds Too Good To Be True

The latest economic outlook according to leading thinktank – The National Institute of Economic and Social Research – is for retail prices inflation to reach at least 17% before the end of the year. The Institute’s deputy director is quoted as saying there will be “no respite” for British households and businesses from “astronomical inflation” in the short term, and interest rates of about 3% will be needed to bring it down. Furthermore, he says average household incomes “would fall by a record 2.5% this year” leaving millions to rely on savings and credit to supplement incomes. And this was supposed to be a light-hearted piece!

We’ve known for a while that a relatively benign period of steady growth, low interest rates and low inflation is probably behind us for now. The real life consequences are reflected in shopping baskets, at the petrol pumps and of course, our massively increased utility bills. Living in such increasingly difficult conditions, it’s little wonder that we can be more vulnerable to the overtures made by those with a seemingly compelling business proposition or investment idea.

But it is worth remembering that these more o en than not turn out to be ‘pyramid schemes’, or ‘multi-level marketing schemes’. For the uninitiated, these are (mainly) fraudulent enterprises where an attractive return on investment, well in excess of the market norm, is promoted or promised in exchange for a lump sum or sometimes a regular payment.

Cautionary tales abound, the most notorious of which was the scheme promoted by Charles Ponzi in the early 1920s. Ponzi hit upon a money making idea that, initially, was entirely legitimate, using fluctuating foreign exchange rates to arbitrage US postal coupons. However, he went one step too far by setting up a company which offered a guaranteed 50% return to investors a er just 90 days, based on the underlying profits made from his postal coupons enterprise. Early investors did indeed receive such a return, but only from the redistributed investments from other investors. This house of cards finally collapsed when more and more investors demanded their capital and were rebuffed. Ponzi was jailed and saw out his days in poverty in Rio de Janeiro. Ponzi’s name long outlasted him as a byword for financial scams and illegal pyramid schemes to this day are o en referred to as ‘a Ponzi Scheme’.

More recent examples include those promoted by Bernie Madoff and a lesser known scheme called PIPs PureInvestor, created by a British ex-pat, Bryan Marsden based in Malaysia, which promoted a guaranteed 2% daily return on investment. Marsden was eventually jailed for money laundering and served a five year sentence. If you’d like to know more, I’d recommend Owen Platt’s ‘Just Numbers on a Screen’, which details how a seemingly sophisticated operation resulted in losses of an estimated 200,000 investors and which bore all the hallmarks of an online cult.

Why I am telling you all this? Well, it’s a gentle reminder that if you’re attracted to a potentially high yielding investment proposition, seek the opinion of trusted family and friends (and of course your friendly IFA). Ensure you do thorough due diligence on the company or individual promoting the scheme, and of course ask yourself ‘Is this too good...’ Well you get the idea.