Oliver Cartade, Guest Writer

Customers of one of the investment schemes waiting to be seen. - Junior Dowie/Staff Photographer

The growth and acceptance that have been occurring in the 'investment clubs' have got out of control.

It is incomprehensible how so many people can continue to give money to these 'schemes', despite the countless warning signs.

I realise that many of the people investing in these schemes might not be very knowledgeable on financial matters.

First off, I would like to dispel the argument that the 'rich man' is out to get the 'poor man' because rich people don't want anyone else to be rich.

You will hear stories about John Doe who lost his job and that if it weren't for 'XYZ' scheme that he would not be able to keep his children in school or feed his family. And that anyone who opposes these schemes is against the poor. Absolute nonsense.

These schemes are playing up that class discrimination to divert attention from the real issues of proving that they are legitimate.

These schemes are targeting both rich and poor, black and white. Sure, there might be a handful that has managed to get out more than they put in, but there will be far more John Does who end up losing all of their hard-earned money.

A FEW FACTS

Fact: Between 2001 and 2006, the U.S. Commodity Futures Trading commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost US$300 million, mostly in managed accounts involved in foreign exchange trading.

And these are just ones in the U.S. There are hundreds in other countries that you can read about on the Internet.

Fact: Not one of these schemes have shown an audited financial statement, signed off by a reputable accounting firm, confirming the assets they, have and the returns they, supposedly, have been delivering.

That should be any investor's absolute first priority in validating an investment strategy.

Anybody can say they do something, and just because many other people buy into it does not make it true. Nobody is asking them to disclose any type of trading secrets, but simply to account for all their assets and liabilities, which would give proof that they really have been generating those returns and that people's money is safe.

Fact: No legitimate investment vehicle - whether it be a mutual fund, hedge fund or any other type of structure - has ever consistently generated the types of returns these schemes are offering.

There are certain private equity funds and hedge funds that deliver fairly high returns, but they come in very lumpy patterns over a long time frame as their investments materialise.

And, almost all investment strategies that offer such high returns will come with significant volatility and have many losing months along the way.

The most successful hedge fund in the world called Medallion Fund run by Renaissance Technologies - which manages only its own money and which has a team of 150 scientists and PhDs - cannot achieve those types of returns.

Medallion achieves 38 per cent net returns annually and has losing months.

'Investment geniuses'

I find it extremely hard to believe that all of a sudden, there are numerous 'investment geniuses' popping up in Jamaica all at the same time, offering the best returns in the world.

It just doesn't make sense. Simple logic should lead persons to see that it is most likely not true. Mathematically, it does not add up.

People who defend these schemes will consistently point to the fact that they are invested and have already made more money than they put in.

And I am sure there are people like this.

But that is the definition of how the schemes work. They rely on the success of the early investors to spread a 'buzz' about fabulous returns which continue to bring in fresh money.

This all continues until (for whatever reason) a large amount of these investors decide at the same time that they want their money back.

At that point, the money the scheme has is not nearly enough to cover what they owe their investors and the whole thing comes tumbling down.

And the people who got in last will be the ones that really lose the most. That is why these schemes are so concerned with keeping new money coming in.

They offer referral fees, spread fluff media about foundations, sponsor events, and other unrelated businesses to give them an appearance of legitimacy. Even the whole method by which you have to be referred to get signed up is a marketing tactic to make it seem like you are being granted entrance to exclusive investment world that only a lucky few get to participate in, (and also to make sure that you are not the type of savvy investor that will ask too many questions).

If you browse through the many internet blogs with discussions on the topic, you will see numerous posts about people not being paid their interest on time because the company's systems are down, or the owner is travelling out of the country, or the banks are interfering. These are all delay tactics.

Signs of trouble

If these schemes can't keep track of a simple payment system, how could they possibly run a complex investment strategy to generate these types of returns? Delayed payments are usually the first signs of trouble because the new money is not coming in fast enough.

Then there are those investors who say they know they are participating in a ponzi scheme, but are simply taking a gamble and hope they are in long enough to make money before the scam collapses.

I say to these people: Shame on you. By doing this, you are basically aiding these schemes to defraud other less-educated investors.

There are many people who are investing far more than they can afford to lose and we should all be looking out for the best interests of the country.

Then there is the whole argument that the commercial banks are "out to get the little guy" and are making huge sums of money while they offer nothing in return.

We live in a competitive world. Outsized returns are hard to come by and if Jamaican banks were making such outsized profits, then you would see every banking chain in the world opening up offices in Jamaica until those profits were normalised.

Jamaican banks might not be perfect, but they are certainly not out to defraud hard-working people out of their money.

If you do a little research, you will see that the rates and returns these banks offer on loans/deposits are in line with other countries of a similar risk profile. Also, people can simply buy shares in Bank of Nova Scotia or National Commercial Bank (and thus share in the profits) as they are both publicly listed companies.

Oliver Cartade works with Safra Bank in London, United Kingdom. Email: o.cartade@jacobsafra.com