Image: pyramidschemeale.org

Image: pyramidschemeale.org

 

By Manelisi Makasi

South African investors have benefited from an era (+15 years) of extra ordinary returns from the local stock market. The general sentiment from fund managers has been to caution against expecting the same levels of returns with some articulating that we can expect an era of low returns going forward.Low returns coupled with rising inflation create an environment where investors look for investments that can continue to provide higher returns which inevitably lead to taking on more risk. Recently we have seen the re-emergence of “saving /online schemes” that offer returns of around 30% per month!

Just typing a return of 30% per month feels ridiculous never mind having an actual conversation about possibly “investing” in such a scheme. Any institution that renders financial services needs to be licensed by the relevant statutory body that regulates financial services. In South Africa, this institution is the Financial Services Board. When you are licensed by the FSB, you are issued with a FSP number. One can also established if an institution is licensed to offer financial services by visiting the website of the FSB and doing a search in the name of that particular company.

What differentiates pyramid schemes from genuine financial services company?

  • Pyramid schemes are not licensed by the FSB
  • They generally offer abnormally high returns, monthly!
  • They do not articulate where the returns comes from
  • They depend on the perpetual recruitment of other ‘investors’ to keep running
  • Lastly, they seems to suspend rational thinking among the group and common sense goes out the window

On the other hand, a genuine investment/saving will quote you a return annually. Even then, only certain types of investments can accurately inform you what your return will be e.g. money market investments.

Investing by its nature implies taking on some level of risk in order to attain a reward at a later stage. Typically, when one invest in schemes like unit trusts, an expected return going forward cannot be indicated with certainty, the returns are linked to a number of underlying factors such as the underlying performance of the shares, bonds, cash and macro –economic factors. Secondly, if your investment includes shares in it, it does not grow in straight line, it moves up and down and hopefully up over the long term but still not in a straight line.

One of the largest pyramid schemes ever operated was by Bennie Madoff. Mr Madoff had a reputable character having occupied some prestigious positions like that of non-executive chairman of the NASDAQ stock market. One could almost understand how investors fell prey to Bennie’s scheme, he had the credentials and his company was registered with the relevant body. What should have been a warning to investors was the fact that his returns seemed to offer consistent returns like clockwork regardless of the stock market environment.

They say that to be a successful fund manager, you need to get 2 of 3 calls right and you will have a very successful track record to speak of. To get every call right is impossible, the greatest investors in the world make mistakes but their mistakes are fewer than the calls they get right. Madoff ‘s returns implied that he got everything right and that should have set the alarm bells ringing.

In South Africa, these schemes are not registered; the individuals who offer them are certainly not your typical institution where you can point what they invest in. Yet somehow, we have individuals (by the hundreds) who are happy to cash in their genuine savings and take their life savings to these schemes all in an effort to get high returns! In the end, these schemes end with disappointment as participants always lose their savings.

So before entertaining your friend/colleague, who is proposing the great investment scheme to you, ask the relevant questions, is it registered? In fact, you can stop at this question because if it is not registered, it certainly sounds like a duck and therefore it is a pyramid scheme!

 

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