Ponzi scheme, investing and gambling

Reading about the current affair with Bernard Madoff, I came across a term of something I was a bit familiar with, a Ponzi scheme.

Back just after the millennium, I met an old acquaintance who told me of some fantastic investment opportunities he had found: you could get 10-15% on your money per month, and you even got a special debit card to withdraw money from anywhere in the world. There were papers about it describing practice and theory, and my friend was an old hand and had been a very successful businessman for decades, so I believed it all. And lost around $5,000 eventually.

Sometimes these schemes collapse suddenly, and sometimes they are dragged out and there keep popping new explanations up about why you can't yet get all the money you were promised. For example they "have trouble from traditional banking institutions", who obviously are trying to suppress competition from this new amazing investment business!

Basically, what I have learned since then is that anything which promises you more than around 5% (per year!) has risk. The higher the return, the higher the risk, it's very simple. That's because the economy as a whole doesn't grow more than a couple of percent per year, and nobody can predict the future. (Track record is no indication.)

Investing is always gambling to some degree. Even for experienced investors. Don't gamble with money you can't afford to lose, no matter what hot tips you get. If something is certain, others will already have heard about it, and the price will have gone up.

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That Madoff guy, jeeeezuz! Swindling for billions! Did he expect to get away with it? And what's the point? How much better will your life be at 100 billion than it is at 100 million?

TC said:
Who knows how many stories, like this one there will be to read, in the coming years!
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