How to Identify a Ponzi Scheme – Part 1
One of my cousin from Ahmedabad recently called me and spoke about an exciting investment opportunity he came across in his friend circle. Scheme sounded too good to be true. Deposit 1 lakh rupee and get 10% interest every month. Yes every month(not year) – 10 percent/month. It basically means in 10 months I get 100% return and annual rate of interest will be 120%.
120% per year.
As soon as I heard it, first thing I told myself was “Ma kasam” (learned this bad habit from Aamir Khan in Rangeela). I was confident enough that this was a bogus scheme and felt sorry about people who have dumped their money in this company. However I asked for some more details about company and it’s business model.
I was told that there is one guy – who is real world James Bond. He does short term Stock Trading and makes 20% per month. He gives back 10% per month to all clients. This guy has collected about 1000 crores in investment from simple middle class people and against it he has got loan of another 1000 crore from one popular bank (I know the bank name – but don’t want to reveal it) . Now he has converted many existing clients in to his agents. If some agent brings new customer with money then in return you get some percentage extra. This guy gives official stamp paper – promisory note for all the amount you deposit.
I would never put my money with this company, however I was wondering how can people be so fool to take part in something like this. I googled for recent scams and such ponzi schemes and found similar sounding schemes in past which turned out to be fraud.
At the end I said – Ahmedabad rocks!
Unfortunately it’s not just limited to Ahmedabad – it started in Ahmedabad but now people from all over India have invested money in this company.
Let’s assume that if I was owner of this Ponzi scheme company – how would I mathematically run such a business. How would I exist financially?
Here’s solution that comes to my mind:
Start with 10 clients – each client gives lakh rupee – collect 10 lakh rupees. Now I have enough money to give 10% to all clients for next 10 months(for each client – 10% of lakh rupee is 10 thousand rupees – every month I would end up paying lakh rupee in interest to 10 existing client). While all this is happening – in 3rd month – some of my existing clients introduces me to a new clients. On 5th month one of the existing client refers his brother, Masa, Kaka, brother-in-law to the scheme – “Bhai I am making 10% for last 5 months – this guy is really good – trust me – just invest some money”. “My brother referred me and he is indeed making 10% per month – let me invest some money”. The cycle continues – new investors bring money for paying interest to existing pool of people.
Everything will work fine until I am getting new customers. I will continue on what are common characteristics of such Ponzi scheme in next blog post.
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