Key Lessons to Learn from Charles Ponzi’s Scheme as an Investor

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Charles Ponzi is one of the most famous con artists of all times. He became a legend who now has a scam named after him by convincing people to invest money in reply coupons. He managed to make more than $20 million back in 1920 with his fraudulent pyramid scheme. Ponzi’s success relied on lavish promises: a return on investment of 50% in 45 days. If you’re a novice investor, here are a few golden lessons to learn from Charles Ponzi’s scheme in order to steer clear of similar scams.

1. Be Wary of Opportunities That Seem Too Good to Be True

… because they often aren’t. Back in 1920 when Charles Ponzi managed to con thousands of investors, banks used to pay an average interest of only 5% per year. In those conditions, the chance of gaining a return of more than 50% in only 45 days seemed a terrific opportunity. However, only a few people, namely the first investors managed to get any returns. Ponzi paid them with the money brought by new investors who got nothing in exchange.

The bottom line is that an offer that’s simply too good can be nothing but bogus. It’s hard to know which investment opportunities are legit and which aren’t, especially if you’re not a financial expert. However, nowadays you’ve got that incredible tool called the internet which allows you to research anything. To make sure you’re not falling for a Ponzi-style scam if you’re being offered an incredible investment opportunity, do some prior research first. If you find very limited information on that topic, or even more so, negative comments and complaints, you’d better steer clear.

2. Don’t Believe Everything You Read

Charles Ponzi was not only a cunning, clever, and persuasive man, he was also lucky … at least before his scheme collapsed. Back in those days, people relied a lot on what they read in the newspaper. Without paying for any advertising, Ponzi simply got noticed and he received media coverage.

So luring and popular his investment scheme became that one of the most prestigious newspapers in the country covered his story. While not all the published articles pleaded for his cause, some having quite a skeptical outlook, Ponzi’s presence in the newspaper increased his prominence and attracted even more investors.

The lesson to learn from this is that you should never fully trust everything you read, even if it appears in a reputable newspaper or magazine. Always do separate research before you invest money to make sure you gather more information from different sources.

3. Don’t Invest in a Scheme if You Don’t Fully Understand Its Mechanism

Few of the investors who put their hard-earned money in Charles Ponzi’s hands back in the 20s understood how postal reply coupons worked. The coupons were bought at a low price from foreign countries and redeemed at a higher value in the U.S. Basically, Ponzi took advantage of an asset he could buy at a low value and sell at a higher price to generate profit. Most of the investors he prayed on didn’t know the first thing about these assets. They were just eager to achieve high returns in little time. The lesson to learn from them is ‘never invest in a mechanism you don’t fully understand’. The chances of being conned are higher if you lack the necessary knowledge to spot red flags.

4. Be Wary of Investors and Brokers Who Don’t Support Their Own Cause

Charles Ponzi made millions in a short time by selling the said coupons and promising high returns to his investors. However, much of the profits he generated went into other assets, not the incredibly profitable coupons he ardently promoted. Instead of giving a lesson of honesty and investing in his own scheme, Ponzi used the money his company earned to invest in traditional assets such as real estate and the stock. The bottom line is that you should be a bit skeptical if someone tries to convince you to invest in a type of stock they don’t own themselves.

For many, Charles Ponzi remains an infamous man. Others, consider him a financial genius. No matter what you think of him, one thing is certain – you wouldn’t like to be tricked by someone like him.  Remember the lessons above next time you ponder an investment opportunity.

Written By Clearwater Management Korea.