Lessons from a Ponzi scheme in Finland

In Finland, a company called Wincapita operated from 2003 to 2008 in Finland, defrauding more than 10,000 victims – about 0.2% of Finland’s population – of approximately 100 million euros.

Here is a post regarding the study conducted by someone on the scheme, seems like the first of its kind.

Some interesting findings and my views on the same are as under:

  • A specific feature of Wincapita is that investors could join only by invitation from a sponsor.
    • Many fall prey to such a scheme, as “exclusivity” is so tempting that the brain stops thinking.
    • We don’t want to lose out on such an “exclusive” scheme
    • The word “exclusive” along with invitation from someone you knew massages the ego and makes one feel special. Ego is the enemy
  • Rantala studied the relationship of personal characteristics between sponsors and invitees. He found that invitees invested more if their sponsors had higher income, were older or more educated.
    • Higher income, more education and old age are not equal to better financial decisions. I have come across many investors in India, too who think that such traits make one a better investor.
    • The Ponzi scheme operators rely on such behavioural traits of masses and employ employees that look educated, smart and are well-groomed and confident – traits many equate with financial savviness.
  • Rantala said. “When information comes from a friend, it overrides safety mechanisms.”
    • This can’t get more ridiculous
    • Trust is surely built on the integrity, but the other and equally important leg of the same is the ability or skills or competence. The best of the friends may be able to offer an honest opinion without any axe to grind, but will he or she be able to offer an informed opinion?
    • In any financial matter, remember while taking someone’s opinion – you need both integrity and competence.

The book’s chapter titled “The Pied Piper” starts with the following line:

“How easily the masses have been led astray” – wrote Charles Mackay in his 1841 classic, “Extraordinary Popular Delusions and the Madness of Crowds”

#RidingTheRollerCoaster – 223

 

 

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The Pied Piper of Hameln

If you search on Google for the “Town of Hameln”, you are led to a website www.hameln.com, which has a tag line: “The official website of the Pied Piper’s town”.

The story of the pied piper is very old. They say it happened in the year 1284, when the town of Hameln (also referred as “Hamelin”) was suffering from the menace of rats. A stranger claimed that he could get rid of the rats. The town mayor promised him a huge reward if he succeeded. The stranger took out his pipe and began to blow on it. Rats and mice came from all over the town. He led them to the river and then he walked into it. The rats followed him only to be drowned.

Successful in his mission, he came back to the town asking for his reward. The town elders thought the reward they promised was too large for the task. They offered him a small token amount or nothing. Angry, the stranger went away. In the evening, he came back with another pipe in his hands. He started to blow on it. This time it was not the rats, but the children of the town that followed him. He led them to a mountain nearby never to return.

This is known as the legend of the Pied Piper. Scholars debate whether the story is true. They argue over the cause of the disappearance of such a large number of children. The jury is still not out on whether it is possible for so many children to be led by just the music of a pipe. How is this possible?

The Pied Piper of Hameln came around 730 years ago, and we haven’t seen another one.

Welcome to the financial markets, where the pied pipers make frequent appearances only to lead many to the mountain of tall promises. Whereas in the pied piper story, the children disappeared, the modern day pied pipers (a.k.a. Ponzis) make money disappear.

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The future of all Ponzi schemes

“All Ponzi schemes, by definition, collapse.”

From the book “Who cheats and How? – Scams, Frauds and the Dark Side of the Corporate World” by Robin Banerjee

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Think, does it really work?

In 2014, a news story int he Times of India caught my attention. A very well known movie star lodged a complaint with the Mumbai police. He had been duped. The con artist had promised to double his money in 45 days and then disappeared. The movie star could not believe that such a fraud was possible. The lure of the high “guaranteed” returns blinded him.

Just to put things in perspective, we present some calculations here. Assume that such a scheme is really available. Assume that one has an option of reinvesting the money in the scheme any number of times.

The scheme would double the amount invested every 45 days, or every 1.5 months. Ethos rate, Rs. 1,000 can grow to Rs. 2.56 lacs in one year, Rs. 6.55 crores in 2 years, and more than Rs. 1,677 crores in 3 years.

At the end of fourth year, one would have accumulated a sum of Rs. 4,29,496 crores. Compare this to India’s fiscal deficit for 2013-14: Rs. 4,90,597 crores.

Think, does it really work? Ask questions. When you are presented with a mouth-watering investment opportunity, your responsibility towards your money is even higher.

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