Scams, Gambling & Investments:
Thursday, July 19th, 2007The internet
is a wonderful source of information - both good and bad. It’s also a
playground of profitable possibilities for would-be and seasoned
shysters and scam artists.
Apart from
pornography, one of the most prevalent types of content one can find on
the web is in the moneymaking category. And I guess, like sex, money
has universal appeal!
Now, this leads to all sorts of potential problems, especially when easy money is promised.
Your task,
should you choose to accept it, is to learn how to spot the difference
between a legitimate moneymaking proposition and a scam. And I can tell
you it’s not automatically that easy.
At least it’s not easy if you allow yourself to be mesmerised by the promise of something for almost nothing.
The starting
point in getting to grips with this conundrum is to realise that greed
plays a big part in human nature. Sorry to be so blunt, but it seems
we’re wired for it.
You see this
played out over and over - whether it’s women battling each other to
grab the best garments in a crazy sale, or crazy people queuing up to
get financially fleeced in some hair-brained pyramid money game.
The motivation is the same. Something for nothing - or almost nothing. And that desire is fuelled by greed.
If you can
accept that you may have a built-in propensity to seek the easy route,
to get your hands on easy money - and factor that into your decision
making - then you will be in a much better position to more rationally
appraise various moneymaking opportunities.
There are two
main generic scams continually circulating on the internet. One is the
"advance fee" scheme, and the other is the "Ponzi" or pyramid scheme.
The first is
epitomised by the "Nigerian Letter" fraud - which is essentially a
promise of big bucks in exchange for some "help" to retrieve the money.
The strategy is to suck you into the scenario to such an extent that
you become emotionally wedded to it. Then, when you are asked to put up
a fee to make things happen, you are already hooked and part with your
cash without a whimper. Never to be seen again.
The ponzi
scam is named after Charles Ponzi who came up with the novel idea of
enticing investors with the promise of very large returns - and paid
them out of new investors’ money. In the end, of course, the last
investors lost their money, and the whole thing was exposed as a
complete fraud.
Some ponzi
schemes are very crude - like the original chain letter. You’d think we
would have risen above that one - but it keeps on resurfacing. However,
most are now more sophisticated, often disguising themselves as an
"investment" with unusually high returns.
Over the last
few years such ponzis have sharpened their act, and now present
themselves with smart, professional looking websites - plausible
wording and an enticing sales pitch. The primary hook, apart from the
promised returns, is the referral fee - if you recommend others. In
this way, the modern ponzi can harness the viral marketing power of the
internet in ways impossible in the snailmail age.
Now, I have
nothing against people playing money games as such (it’s their money),
provided they know the rules of the game, and understand the old maxim
"buyer beware". You see, I’m very much of the opinion that people
should be allowed to do what they like with their own money - and not
have some bureaucrat tell them what they can or cannot do.
However, when
you remove bureaucratic oversight, you have to take responsibility for
your own decisions, and realise what you are getting into.
If you know
the risks, then it becomes like gambling - where it is clearly
understood that there are winners and losers. And I certainly don’t
advocate that the state should criminalise gambling.
However, it
does appear that some people can’t tell the difference between gambling
(in all its forms), a ponzi, and an investment. And this fact is often
used by the authorities as an excuse to enact laws to protect people
from themselves.
For example, it’s imperative to distinguish between ponzi schemes and gambling. And it shouldn’t be hard.
Gambling
involves taking a stake in a money game where there are clear rules and
directives as to who becomes the winner. Luck is the usual arbiter in
gambling - and this is managed in various ways. It could be lotto,
where numbers are drawn from a barrel; it could be a lottery where one
person has the lucky ticket number; or it could be horse racing or
sports, where you place a bet on the outcome of the race (where "form"
and luck both play a part).
The point is
that in gambling, you know there will be winners and losers, and you
know the means by which this will be determined. You have full
disclosure
Not so with a pyramid or ponzi.
If a ponzi is
disguised as an investment, then it is likely to offer high returns (to
appeal to greed), and use referral fees to get people to spread the
word.
Now, the
explicit message is that everyone who joins up will make say 10%, 20%
or even 100% per month on their money. However, the truth is that only
the early birds will catch the worm and walk away with the loot. Why?
Because the funds to pay out the promised returns come from the new
players.
So, the
pertinent question is, do these new players fully understand they are
funding earlier "investors", and so they realise they could lose their
shirt? Probably not.
If a
moneymaking scheme states that it is a "game", makes no guarantees, and
openly declares that your money is paying those before you, then you
know the rules before entering - and cannot cry over spilt milk if you
lose your money.
On the other
hand, if money is taken using terminology that indicates a legitimate
investment is being offered - which later turns out to be a ponzi scam
- then clearly the participants have been defrauded, because they were
not told the true facts.
In a
situation like this, one should be able to pursue legal action to
reclaim the lost funds - because such money was taken under false
pretences.
However, such
a retroactive course of action does not mean one shouldn’t exercise
rational judgement before entering into any form of investment - even
more so, if exceptional returns and referral bonuses are being paid!
This brings
up another dilemma. You’ve all heard the old maxim: "If it sounds too
good to be true, then it probably is". It’s one of those well-worn
slogans that is sometimes more confusing than helpful.
The first
problem is to determine "too good to whom?". This is very subjective,
and the answer will vary as much as people vary.
If I offered
you 100% per year - would you consider it "too good to be true"? Or
would you automatically presume I was presenting you with scam?
Well, I can
tell you that such an offer is certainly not too good to be true (under
certain circumstances) - and yet there are many, many people who would
swear black and blue that it was.
You cannot
simply fob off an offer because, in your own opinion, it offers high
returns. You would need to do some digging to discover whether such
returns were possible or justified. So while the maxim is useful, it is
not a cure-all or catchall strategy for dealing with real life
investment opportunities.
So you have
gambling, which clearly discloses the risks inherent in participating;
ponzi/money games, which usually don’t, and are essentially fraudulent
offers; and finally you have real investments.
Of course,
putting your money into legitimate investments does not eliminate the
risk of losing your money - it’s just that such a structure is not set
up with the purpose of defrauding you! When you invest your money you
should demand full disclosure as to the inherent risks of the
proposition.
However, no
investment is 100% safe. Even government bonds depend finally on the
state’s ability to forever tax its citizens - something I personally
wouldn’t want to bet on!
And this is
where we come across yet another old maxim - "the higher the potential
return - the higher the risk". Once again, this is a useful indicator -
but not infallible, as there are obvious exceptions.
So, to recap:
the essential difference between a scam, gambling and an investment -
is that the "rules of the game" are known in advance, and you
participate in the full knowledge of the risk you are taking.
A ponzi scam deliberately misleads, whereas gambling and investing offer disclosure as to the risks.
You cannot
avoid risk - it is part of life. You will never find a truly risk-free
investment. Even money in the bank, in most countries, is deemed
"unsecured" - and therefore at risk, should the bank fall over.
So accept
risk as part of life, and concentrate on weighing up the risk -
according to your own requirements and your psychological response to
such risks - against the perceived benefits you may receive.
Some people
literally can’t sleep at night if they feel financially exposed. While
others are like adventurers, wading through shark-infested waters, with
their eye on the end prize.
There’s no
doubt some people get lucky and make money from gambling, or get in
early and make money from ponzis. But there’s no doubt that most people
lose money from such "opportunities".
The challenge
for you, is to keep your head on, stay calm, don’t be driven just by
the promise of a quick buck, but to assess the offer in the light of
your financial position (whether you can afford to take a risk or not),
and make a reasoned decision.
Don’t be
panicked into action - panic is never a good emotion. The best advice,
if being rushed by someone, is to withdraw and give yourself time to
evaluate something with a cooler head.
Something else will always come along, so don’t be fooled by someone claiming that you will lose out if you don’t say "yes" now!
The world
(and the internet in particular) is bursting with opportunities - and
once you have a clear idea of what you are comfortable with, you will
have plenty of time to participate and profit.
And remember, you alone are responsible for the decisions you make. Caveat Emptor! "Let the buyer beware".
Yours in freedom
David MacGregor