Once again we were confronted with news of a collapse of some dubious financial arrangement, MMM, founded by some serial Russian convict. Participants in the scheme took to media and social media with much aplomb to defend their scheme and refute allegations that the scheme had gone belly up.
My basis for calling MMM a financial scheme, is because the scheme in its current guise was cleverly designed to technically not meet criteria to be called a ponzi scheme by de-linking ‘maturity’of investments from referrals. Interestingly enough, the owners of the scheme made attempts to legitimize their scheme by registering under the umbrella of Stokvel Association, an attempt which was unsuccessful. So somehow this MMM finds itself in what we can a No Man’s Land. It is neither a stokvel, nor a Ponzi scheme in the conventional sense. Being in No Man’s Land, the scheme is neither legal nor illegal necessarily.
What makes pyramid schemes thrive? What compels people from different walks and backgrounds (including educational) to always seek these miracle schemes that offer astronomic returns? I can think of many reasons but ultimately I think it boils down to two drivers; greed and the innate ‘not me’ syndrome.
Whether the scheme has indeed collapsed or whether it is still to collapse is neither here nor there. I wish to share some free lessons which will come in handy especially to those that will have benefitted at the expense of late or even greedier entrants;
- Money is a standardized, unitized expression of value. It is not money itself that grows, instead it is value creation that leads to the appreciation. What exactly do I mean? If three of us club together contribute R1, there will be R3. If our scheme says invest R1 and get R3 return, there will have to be three R3 for each of the first investors, meaning we will need 6 other participants to invest R1 each. In turn for the 6 new participants, there will have to be 18 new participants. This means our scheme will be viable for as long as new entrants join in the required multiples. This is certainly not how value is created. Value is created when the 3 of us club together and invest in a business venture which is able to sell to customers at a higher revenue than what it costs to run it, thereby generating dividends.
- Banks are not the enemy. Neither are banks competition to pyramid schemes. Being a tightly regulated industry, banks have a duty to ensure that within the banking system, all funds come from legitimate sources. Their effort to caution customers arises out of this duty. Most importantly we need to appreciate the difference between savings and investments. Banks typically are for the former whereas investments are best suited to other avenues such as capital markets.
- Time is your best friend in the world investing. It is only with time that the power of compounding is triggered. This concept applies even with livestock farming.
As we reflect on these, we need to be mindful that ‘money does not grow on trees’.
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