In the third episode of this ‘Financial Crises’ season, Simon and Bex discuss what we can learn from classic get-rich-quick ventures, such as Ponzi schemes.

Some key points of interest covered in this episode include the following:

• Introducing this week’s topic, Simon explains that Ponzi schemes are a really good example of the way in which money can gain a powerful grip on our hearts and cause us to make unwise financial decisions purely because of a fear of missing out on a big payout. [00:44]
• To illustrate the way in which people are manipulated to join Ponzi schemes, Simon tries out his best persuasive techniques on Bex! [01:39]
• Ponzi schemes have existed before and after Charles Ponzi’s money-making projects in 1920s America, but his scam involving postage stamps (international reply coupons) was the classic example of an investment pitch which had absolutely no substance. In theory, he could have built up a profit from buying and selling stamps in different countries to take advantage of post-war currency fluctuations. In practice, he simply talked a good game and relied on money flowing in from subsequent investors to reward the early adopters of the scheme. However, when the money-go-round eventually came to a crashing halt, as it was bound to do, it was not only investors who suffered – six banks failed because of their involvement with Mr Ponzi! [04:57]
• Bernie Madoff used similarly deceptive techniques to build up his financial empire, which eventually collapsed in 2008. It is estimated that he managed to defraud over 65 billion dollars from investors who thought that they were buying into a legitimate investment strategy, spearheaded by a well known and highly respected Wall Street icon! [08:26]
• A key learning point from the devastating effect of Ponzi schemes over the years is that if a financial proposition sounds too good to be true, then it probably is! [10:13]
• Getting reliable investment advice, based on sound research and understanding, is not always a straightforward task, especially when finfluencers (financial influencers on social media) and other non-expert voices are prominent these days. If you are seeking serious financial advice, the best approach is to consult a regulated individual or firm from the register maintained by the Financial Conduct Authority. [11:47]
• Simon comments that the Book of Proverbs is a particularly good source of pithy and unambiguous warnings about the dangers of chasing money, especially when expressed in a contemporary translation: the New Living Translation of Proverbs 13.1, for example, says, ‘Wealth from get rich quick schemes quickly disappears. Wealth from hard work grows over time.’ And Proverbs 20.17 states that, ‘Food gained by fraud tastes sweet, but one ends up with a mouthful of gravel.’ [14:33]
• When asked whether Bitcoin is a Ponzi scheme, Simon observes that there are similarities between the two, but Bitcoin initiatives tend not to have a single promoter in the way that Ponzi schemes do. Simon also comments that he would define Bitcoin as an example of speculation rather than being a genuine investment activity. [16:14]
• Pyramid schemes mirror the approach taken by Ponzi in that they, too, have a strong hierarchical structure, with early adopters likely to benefit the most. Pyramid schemes do, though, trade genuine products; it’s just that the pricing mechanism is deeply flawed and ultimately leads to the goods being massively overpriced. [19:11]
• Simon’s concluding remark is to, ‘Get rich slow’, taking advantage of tried, tested and legitimate means of growing financial resources over time. [20:59] For her part, Bex reminds us of the importance of prioritising the things that we regard as ‘true riches’, such as relationships, how we spend our time and being generous. [21:28]
• Our next episode in this season will look at how financial bubbles are created and how we should respond to them. [21:49]

Suggestions or feedback arising from this episode can be sent via email to [email protected] while messages via Instagram should be directed to @whereyourtreasureispodcast.

Our Instagram page will also provide you with additional content and features.

This show has been brought to you by Free Range Podcasting.

You can sign up to receive news and updates about this podcast by filling out the brief form to which you will be taken when clicking here: https://where-your-treasure-is.kit.com/13c7b5fec6

Simon

Welcome to ‘Where Your Treasure Is…’, the podcast where faith meets finance.

Bex

I'm Bex McGregor.

Simon

And I'm Simon Glazier. Each episode we're going to explore how biblical wisdom can guide our everyday money decisions.

Bex

We'll be looking at how we can give generously, save wisely and navigate the complex financial realities we face.

Simon

But remember, investments can go down as well as up.

Bex

This is, ‘Where Your Treasure Is…’

Simon

Let's get started!

Bex

Hello. We are in episode three of season 13, which is all about financial crises. And today we are going to be looking at Ponzi schemes.

Simon, why are we looking at Ponzi schemes?

Simon

Ponzi schemes, one of the classic financial blunders that people can fall into, I suppose. And we're not going to focus just on Ponzi schemes. We're going to use it as a bit of a springboard into other topics.

And the reason for the season is to try and highlight some of the emotional responses we have to money and how any of us can get caught in believing something that isn't true.

In trying to get rich quick, in trying to get on the bandwagon of making money, we're going to flag the issues, explain what some of the schemes are, but also try and look at what the Bible says and how we can protect our hearts from, in reality, it's a bit like just greed getting hold of our hearts: ‘Someone else has got it; I'm missing out!’ - fear of missing out on making lots of money!

Bex

Just as you were speaking, I was thinking about how basically this episode is, how do we guard our hearts from greed and how do we spot it before we are controlled by it?

So, what are the defining features of a Ponzi scheme, Simon?

Simon

Well, I'll tell you what, I shall pretend this is not financial advice. I shall pretend to invite you to join Simon’s, ‘This is Definitely not a Ponzi Scheme Scheme’.

And you all know me and, clearly, I'm a well qualified and established reputable financial planner. I've got all the credentials you could ever want. So, if anybody is trustworthy, then it's going to be me. Don't listen to anybody else! Just look at me: listen to my words; look into my eyes; look into my eyes! The returns I'm going to deliver, Bex, are superb!

Bex

Really?

Simon

You won't get them anywhere else: reliable, guaranteed. Look at my Google reviews! Everyone says, Simon has delivered. You've got to get in now because it's such a good scheme. Don't miss out on this great opportunity!

And what I'm doing is something that's genuine. I'm investing money sensibly. I'm using lots of wise research, investment tactics - just things that anyone could do - but I'm doing better than anybody else. It's all just very mainstream. Nothing weird, nothing fancy going on here, OK. And if you want paperwork, I'll give you paperwork.

Bex

Love paperwork!

Simon

Just sign up here. Paperwork will follow. Post isn't great, but you will get it.

Now, at this point, Bex, you're convinced?

Bex

Yeah, I'm quite grateful we're on Zoom, to be honest, because this is quite intense!

Simon

Well, I'll put my bank details up at the bottom of the screen, so you can just send it across to me.

Bex

Thanks.

Simon

Now, once you're in, OK; I'm going to guarantee your returns.

Bex

Great.

Simon

What will be helpful - do you know anybody else who might want also to get great returns?

Bex

Yeah, I think our podcast producer, Mike, would love some returns.

Simon

Well, give me Mike's number, OK.

Bex

OK, I mean, why not share the profit!

Simon

OK, I'll tell Mike all about it.

Now, in this moment in time, I'm guaranteeing you, Bex, some money back.

Bex

Amazing!

Simon

10% a week, guaranteed, OK, to pay you back.

However, I actually don't have anything going on in the background. I don't have a genius, brand new, never been tried before, investment strategy.

Bex

I'm shocked!

Simon

I'm sorry, I’m letting you into the secrets here behind the, ‘This is not a Ponzi Scheme Scheme’. I don't actually have any money. However, what I'm going to do is this: I'm going to give Mike the spiel, OK. And because I'm a great salesman and he trusts me - and I might actually get you to tell him that this is legit, and he trusts you - we'll get his money, OK. And I'm going to give some of that to you. You'll get your return - job done! I mean, everyone's a winner, everyone!

Bex

And then it's Mike's problem.

Simon

Well, let's get Mike involved. I bet he knows some people who could do with these returns… and so on and so forth.

And the aim of the Ponzi scheme is that your new investors, those who are giving you money for the first time ever, are helping pay back those to whom you have promised high, stable, guaranteed returns. And all you're doing is moving money around. You're robbing Peter to pay Paul, or in this case, robbing Mike to pay Bex!

And I'll just take a slice, quite a big, healthy slice, off the top, and perpetuate this thing as long as I can until… well, in reality, something has to happen because it can't go on forever!

Bex

Honestly, just the audacity of it and the blatant corruption just enrages me! And you might think, ‘I would never fall for that. That's insane!’ Simon, are they still going today? We're about to, kind of, look at the history, which starts in the 1920s. Is this just a historical thing that isn't relevant to us?

Simon

Ponzi schemes have existed before the 1920s, but Mr. Ponzi, Charles Ponzi, was the first person to really be caught on such a grand scale that his name got used, to coin a phrase, as it were. And what he had was, to begin with, a legitimate investment idea. In reality, it was a speculation idea. And it took advantage of the fact that back in the 1920s and early 20th century, there was the gold standard. And the gold standard basically meant that exchange rates between countries and currencies were fixed. A certain amount of gold would get you a certain number of pounds or a certain number of francs or a certain number of Deutsche marks - this is a long way pre-euro - and a certain number of dollars.

And so, you kind of knew you could buy something in one currency and you knew how much it was worth nominally in gold, and then it would be worth the same somewhere else. But around World War I, there was massive devaluation of currencies. The money just wasn't worth as much post war.

But the postal services internationally had created a solution to the problem of sending mail around countries, which was you could basically buy a stamp - here's a stamp that I can use to post something from America back to the UK - and you could transport those over to America and then post stuff back to the UK. Fantastic! Price fixed in advance.

But what sometimes happened was because of the change in value of currency, I could buy something maybe in - let's give it more modern values - a two pound stamp in the UK, but it was worth £10 equivalent in dollars in America because of the revaluation of the currencies. And this guy, Mr. Ponzi thought, what I’m going to do is buy loads of these prepayment stamps - they were called international reply coupons - take them overseas and sell them for a profit.

Thing is, he never did. He had the idea and then he just got people to buy into it! You know, just give me your money and I'll do all this trading and you get the profit - job done! And people loved it so much that he made an absolute fortune without doing any of the hard work.

Bex

And in just eight months he made $15 million, which is absolutely insane. I'd actually love to know the equivalent in today's prices.

But the reality is that, also, he was taking advantage of people in a period of recession, in a period where actually life was really hard and there was all the emotions to do with the war. And so not only was he conning them with money, but you can see the way he was manipulating people's emotions and situations.

And so that's obviously the most iconic one, if you like, the one that spawned the name.

Simon

It was so big that when his company failed, he took down six banks with it as well!

He borrowed so much money from the banks that all the people who had been impacted by the closure of the banks, even if they weren't part of the Ponzi scheme, were impacted too. So, there was a knock-on effect that caused ripples through the economy, in fact the international economy.

He did eventually pass away about 20 years later, leaving an entire estate worth $75!

Bex

Feels like quite a cautionary tale!

Simon

You think, therefore people wouldn't do it, would they?

Bex

Yeah. And you also feel when you look at it in the cold light of day that you wouldn't do it - you wouldn't get involved in any way, shape or form. If you were a bank, you would spot that. Has that been the case?

Simon

Sadly, no. There have been other Ponzi type schemes. I'm sure many of our listeners would have heard of the name of Bernie Madoff. And you can debate to a degree whether his was a pure Ponzi scheme, because he was a legitimate banker investor. He was for a while the head of the NASDAQ, which is the American index, like the London Stock Exchange - the exchange for technology funds and stocks in America. Well respected guy. But by the end of his exploits, shall we say - this is back in December 2008 - he had managed to defraud over 65 billion (billion with a ‘B’) dollars from investors who thought they were investing in a legitimate, tried and tested, reputable investment strategy by somebody who was known really, really well.

So, that's almost 100 years later and it was still going on.

Bex

And it makes you wonder what would you even do with $65 billion! That is a ridiculous amount.

Simon

We’ve got to wonder how much did he actually keep if it, kind of, got cycled around people. But some of it certainly ended up in his pocket.

Bex

But, ultimately, he didn't end up keeping any of it because he was given a 150 year criminal sentence, which I suppose just shows how seriously the American court took it, and, actually, the way they valued the damage to the victims and the financial loss that people suffered.

And in a minute we're going to talk about maybe some modern day equivalents and whether they are Ponzi schemes or not, or what we can learn from them. But before we do that, Simon, what are the basic lessons we can learn from Ponzi schemes?

Simon

As we're going to find out with a number of financial crises we'll talk about over the coming episodes, they're only really obvious to everybody in retrospect - that hindsight 2020 vision. If it was obvious, people wouldn't have done it.

Bex

Yeah.

Simon

I think one of the core learning points is that if it sounds just too good to be true, then it probably is!

And unless you're prepared to lose all of the money that you're risking, not even the chance that you'll lose some of it, you have to be prepared to lose all of it - and if you are, then you're going in with your eyes open: I'm taking a risk. It's a big risk. If it comes off, I might win big.

Should we take that attitude? Probably not. But you're going in with the chance that, yeah, you lose it all. If you can't afford to lose it all, then don't go there.

There are mainstream, established, low cost, risk adjusted returns that are available to normal, mere mortal investors like you and me. So much so that Ponzi schemes are illegal. If you want to try one, then you're going to end up probably in court because you can't get away with it forever. By definition, they have to run out of people to sell to at some point.

And I think it highlights for any of us, if there is an opportunity being presented to you and you don't understand where the money is being made, how the money is being made, and that it feels like an abnormal amount of money to be made, then don't go there. The chances are someone somewhere is making money off you rather than helping you to make money.

Bex

So, it sounds like what you're saying is that, practically, we should be doing our own research and due diligence before making, certainly, significant investments - arguably, any investment.

But how do we do that because I imagine in the situation of a Ponzi scheme, you look into and initially everything you find is going to be perpetuated by them and going to be saying, ‘It's great - like, everything works!’

Simon

Yeah. How do you get that third party research done? And it's really hard.

I can imagine that even with sophisticated, experienced, wealthy clients, they don't do a lot of diligence and research on the underlying investments that are being recommended to them. What they probably do is they go with a gut feel of the person that is doing the selling. And if you're lucky, they might have had some kind of personal recommendation or referral.

What you certainly can do in the UK, at least, is if you're getting financial advice, then you need to be going through a regulated financial advisor. I say that because if somebody is not regulated and they are giving you financial advice, then they're breaking the law.

And a classic example of that are the finfluencers, financial influencers on social media, many of whom are stepping into the territory of giving financial advice, but who have no qualifications, experience, not regulated. And so, what are they doing? They're getting paid a kickback; they're getting paid sponsorship; they're getting paid for getting hits on their sites to sell advertising because they just want to promote somebody else's product when they haven't got the skills to do the diligence or the research. But it's money in their pocket.

And the regulator in the UK has taken to task a number of finfluencers for breaking the law, giving financial advice and not being qualified.

How do you know if they're qualified? You can go to the FCA, the Financial Conduct Authority - that's the regulator for financial services. They have a register of all regulated firms and individuals, and, in fact, a regulated individual should be telling you, ‘Look, here is how to check me out. Not using my own website, not using my own referrals - go straight to the authority, go straight to the regulator, check that I'm there.’

Then there are also third party tools where you can check, much like TripAdvisor, for your financial advisor - a financial advisor advisor!

Those tools are out there to check that other individuals, without receiving any compensation or return, are giving good stories about the advice they've received.

Bex

Really helpful to know and a really interesting example you gave there in terms of just opening our eyes to the fact these kind of schemes are being reinvented all the time - whether that is on Instagram and TikTok or whether that's through selling stamps, they keep popping up and I presume will continue to because of our fundamental nature.

I'm guessing that the Bible's probably not pro get-rich-quick schemes, but is there actually anything that, biblically, would back up this point of view?

Simon

Proverbs is probably the go to place to begin with for your snippets about how to manage wealth. So, here's a few proverbs that talk into the topic: Proverbs 13.11, ‘Wealth from get rich quick schemes quickly disappears. Wealth from hard work grows over time.’ That one's from the New Living Translation because it just sits quite nicely with our topic for today.

Proverbs 28.20, ‘A faithful man will abound with blessings.’ (A faithful woman will also abound with blessings.) This is from the New King James Version. ‘But he or she who hastens to be rich will not go unpunished.’ ‘To hasten to be rich - get rich quick!’

And then Proverbs 20.17, ‘Food gained by fraud tastes sweet, but one ends up with a mouthful of gravel.’

So, for those that are contemplating the get quick rich scheme for themselves by defrauding others, the Bible, again, is very anti. So, while it doesn't say much against Ponzi schemes specifically, it is very pro working to generate wealth and not scheming to generate riches quickly, which unfortunately still happens an awful lot today.

Bex

And I suppose we see that principle repeated throughout the Bible. I'm just thinking in Ephesians where it talks about ‘put off your old self and put on your new self’. And one of the examples it talks about is, instead of stealing, work hard and share what you have earned with others. And so, that principle keeps running throughout the Bible, which is always helpful.

So, to begin to wrap up this episode, I'd love to throw two different things at you, Simon, and for you to tell me whether they are a Ponzi scheme or not. OK, Bitcoin - number one!

Simon

Is Bitcoin a Ponzi scheme? Not in the classical sense, in that there isn't one massive Bitcoin proponent. From time to time, certain celebrities do like to promote their own version of a digital currency, and I think that's getting a bit closer to the Ponzi scheme idea.

But I think the issue with Bitcoin is that it isn't fundamentally an investment. What is an investment? An investment is a place you put your money which has an expected return. You put your money in the bank, you expect to get interest; you buy shares, you expect to get dividends and hopefully some capital growth as well. You put your money in property, you hope to get rent; you put your money in gold… Oh, gold doesn't give you anything! You're just hoping it's going to go up in value in the future.

And gold goes up in value because either demand increases or, actually, because demand increases! It's the only reason gold goes up in value. Can you predict an increase in gold? No! So, it's more speculation than investment.

But people hold onto it as a store of wealth, thinking, ‘I'll always be able to sell my gold.’ And yes, but you don't know what price for. Bitcoin feels a lot like that - it doesn't give you any return.

We're not talking about the underlying mechanics of digital currencies, of the blockchain, which I think has a lot of potential uses from a very basic point of view; but, as an investment expert who is recommending to people, should you invest in Bitcoin… it's not an investment; it is a speculation.

And the only way you're going to get your money out of Bitcoin is if one day somebody else in the future wants to buy it from you for more money than you put in. That feels a little bit like a Ponzi scheme: someone else has to come along and buy it for more money.

If, one day, there was a regulation change that said, actually, you know what, in the UK, we're not going to accept Bitcoin as a means of payment for anything, its value would collapse instantly - it doesn't really have a core underlying value. You can't use it; you can't make things out of it like you can with gold. So, I would say Bitcoin is not strictly a Ponzi scheme, but it's more like a speculation than an investment.

So even if you feel I'm going to invest in Bitcoin, because I think it's going to turn good, two things: one, be prepared to lose all the money you put in Bitcoin.

Number two: if you're holding it as part of a diversified portfolio, then make sure you're holding it in proportion to the value of Bitcoin compared to everything else in the world. And you might find that you could allocate 1 or maybe even 2% of your wealth to Bitcoin, if all your wealth is in stocks and shares and property; and if it's not all, then even less goes to Bitcoin.

So, it's a small part of your wealth. It's a speculation. Be willing to lose it all and then you've got to sell it one day as well. And selling it is just as hard as buying it in terms of trying to get your money out.

There's Bitcoin in a nutshell from me.

Bex

Very interesting! I would now love your thoughts, if you would be so kind, on pyramid schemes.

Simon

OK, so a pyramid scheme is much more like the Ponzi scheme, whereby there is this hierarchy: the earlier ones in, generally do better; but with a Pyramid scheme, you are selling, technically, a legitimate product.

You might say, right, we're going to sell widgets. So, I get to recruit you. Bex, to be widget salesperson number one, and I will do the marketing for you, and you'll pay me a small fee and maybe I'll get a cut of the widgets that you sell. But, more importantly, what I want you to do is convince other people to also become widget salespeople. And you will get a cut of what they pay into the system and the widgets that they sell. And then you convince them to go and sell widgets. And so, the money is gently creeping up the pyramid.

But because there's either a cost involved in getting into the scheme or there's a cut that gets passed up the pyramid, those that get in early, earn more; those that get in late. can basically earn nothing - depends if they're good at selling the idea of selling to other people and, mathematically, the whole thing has to collapse.

Generally, what they're selling isn't worth the cost that you're trying to sell it for. They're either worthless and you try to recruit people into the pyramid - that's where the profit is - or you're massively overpricing things and, eventually, there's no demand to meet all this need. And those that got in too late, lose out.

So, if you're being invited to join one of these things and it costs you money to get in, or you're being asked to go and recruit additional salespeople below you, if it promises get-rich-quick, easy money, and if the organisational structure feels a bit complex and there's jargon or you can't really understand the trail of the money, steer clear!

If you don't understand it, don't do it! If it sounds too good to be true, it probably is!

Bex

Simon, is there anything else you want to share on Ponzi schemes and the idea of getting rich quick before we wrap up today?

Simon

Final advice: get rich slow! And to get rich slow, means starting early, investing regularly, being disciplined, letting compounding growth and compounding interest do its magic - the eighth wonder of the world!

Don't rush to get rich quick. It takes the place of God in our hearts. And we want our treasure to be where our hearts want to go. And my heart wants to get to heaven. I don't need lots of money. I just need lots of God!

Bex

And I think the challenge in what you said there as well is, what is rich? Is it purely money or is it our relationships, how we spend our time and being generous, which we've talked about multiple times. So, feel free to head back to earlier seasons, particularly season one, ‘What is giving?’ if you want to explore that in more depth.

We will be back with another episode on a financial crisis.

Are we going to tell people what it is, or are we going to build a bit of suspense?

Simon

We're going to talk bubbles next week! I'm forever talking bubbles with Bex McGregor on episode four, season 13 of the ‘Where Your Treasure Is…’ podcast!

Until then, I shall float away into the sunset. It's goodbye from me!

Bex

Well, I'm just hoping the bubble doesn't burst! I will see you next time.

That's it for this episode of, ‘Where Your Treasure Is…’

Simon

Thanks for listening. Let's keep learning to be good stewards of all we've been given.

Bex

See you next time.