You’re wasting very
valuable time, Roger!
Tuesday, June 18, 2013
Speaking
of Scams…
Last week I talked about Ponzis and Pyramids and was planning to move on to something else. But I happened to catch a financial advisor on the radio as I was driving around town last Saturday. It was pretty much just an infomercial designed to get people to attend his seminars (no phone calls were taken) Not much useful information was given but lots of criticism of mainstream financial advice and advisors.
Last week I talked about Ponzis and Pyramids and was planning to move on to something else. But I happened to catch a financial advisor on the radio as I was driving around town last Saturday. It was pretty much just an infomercial designed to get people to attend his seminars (no phone calls were taken) Not much useful information was given but lots of criticism of mainstream financial advice and advisors.
As
this man tried to convince his audience of his superior knowledge he shared a
story about meeting with three finance professors at a major university. These
three professors (according to the man on the radio) told him that in their
upper-division finance courses they would advise their students to use 15-year
mortgages on their homes. He then went on to say that these finance professors
were AMAZED when he showed them how
much better off they could be if they took the difference in payments between a
30-year mortgage and a 15-year mortgage and invested that difference in a stock
fund. He went on to say that those professors had never seen anything like that
before.
SAY
WHAT! I almost drove off the road. This cannot, and I mean CAN NOT,
possibly be true. Leverage is one of the most basic concepts in finance. I have
written about it twice in this blog’s first two months (April 30th
and May 28th) His claim would be equally incredible had he told us that he wowed three mathematicians with the quadratic formula.
How
can I be so sure?
First,
I have taken virtually every finance course that exists at both the masters and
doctoral level and there is no doubt that anybody with a doctorate in
finance has a firm understanding of the basic principles. I have also taught in
all three areas of finance (corporate finance, financial markets and
institutions, and investments) and I am very familiar with the undergraduate
finance curriculum and it is extremely unlikely that any remedial rules of
thumb regarding mortgages would ever come up in an upper division finance class.
In fact, hardly any applications involving personal finance are covered in the
finance major. The curriculum focusses on corporate finance and business
problem solving. Yes, a personal finance class would cover these topics (and I
certainly address them in the personal finance class I teach) but this is a lower
division class designed for non-majors.
Most
people listening to the radio last Saturday probably believed this man’s claim
that he schooled THREE (not one, not two, BUT THREE) finance professors (he
also claimed to have trained over 3,000 financial advisors but only 200 could
pass his final exam! Does anybody see a turnip truck?).
So
where does this leave those listening on the radio? VULNERABLE! The whole point
of his story was to put a chink in the armor of those who we traditionally look
to as experts and to elevate those who are peddling less than stellar (and typically
very expensive) concoctions. Yes, he has them right where he wants them.
Moral
of the story: Watch your wallet!
Of
course, there is plenty that we do and do not know (for real) in the field of
finance. For those interested in what these are relative to investing, the
following article is required reading:
http://www.nytimes.com/2013/05/19/business/for-stock-picking-advice-dont-ask-an-economist.html?_r=1&
MM
Tuesday, June 11, 2013
Ponzis, Pyramids and Related Scams
Sadly,
there are scams everywhere we turn. While there are many variations, a couple
of themes are quite common: Ponzis and Pyramids.
Charles Ponzi may not have been the first, but he was the one who made it famous in Boston in the early 1900s. The Ponzi scheme is a way for an investment advisor/manager to attract more customers and more money. Funds received from new investors are used to pay older investors. With the older investors boasting of the enormous returns they received with superstar advisor Joe Bigbuck’s, more investors are attracted to Joe. This can be kept going for as long as high returns can be funded for the older investors with new investor money. This, of course, requires that new customers be brought on board in large numbers. However, with big publicity for "out smarting the markets", all these balls can be kept in the air for quite some time (e.g. Bernie Madoff).
A pyramid scheme is more complicated and is often disguised as a legitimate business opportunity. What it has in common with the Ponzi scheme is that it is a direct money transfer from one group to another. In other words, some people benefit at the expense of others (a zero sum game). Here, participants knowingly give money to those higher on the pyramid with the expectation that they will get to collect money from those they recruit as they are moved up the pyramid. So what brings in these new recruits? Greed! When they see how much those at the top of the pyramid have made, they cough up the money and go on a recruiting binge with family and friends.
Multi-level (or Network) marketing is probably the best known pyramid scheme. Okay, MLMs are not LEGALLY considered pyramids. Through massive lobby and compromise they have largely escaped the law. But that doesn’t change the fact that the economic function of MLM is that of a pyramid (in economics, if it looks like a duck, walks like a duck, and quacks like a duck, we still call it a duck even though politicians may call it a giraffe)
What differentiates multi-level marketing from a pure pyramid is that MLM involves the sale of a product. It really doesn’t matter what the product is because the product is merely a distraction. MLMs do, however, tend to invest heavily in the development of cosmetics and nutritional supplements because this allows them to make extraordinary claims -- that cannot be proved or disproved – and generate the hype and excitement necessary to charge multiple times the price of similar products. It is this difference in price that flows up the pyramid. Robert Fitzpatrick of Pyramid Scheme Alert sums it up:
... multi-level marketing schemes (MLMs), offer a "product" and claims that the "sale" of a product automatically makes them legal. Camouflaging the pyramid money through a "product purchase" and then calling the pyramid payments "commissions" is the preferred disguise for money-laundering in MLM pyramid scams. Usually the products are absurdly over-priced, not retailed, and are only purchased by the "salespeople." These purchases actually serve as "tickets" to participate in the pay-to-play scam.
So, why are people willing to pay extravagant prices for miracle skin creams, exotic juices, and honey made from super bees in the Sonoran Desert? Again, because they believe that they will be able to recruit others who will do the same.
The pyramid structure of MLM came to light in a big way when a law suit opened up the tax returns of Amway distributors in Michigan. In direct contrast to the claims of the MLM industry, only 1% (those at the very top of the pyramid) made significant amounts of money. Where did the money come from? It was a direct transfer from the bottom 99%. Where do these 99% come from? As you can imagine, constant recruiting is required to keep this going (another feature in common with the Ponzi).
Why MLM is legal has always been puzzling to me. On the other hand, it really shouldn’t be. An enormous amount of political contributions have been made by the MLM industry. This is the most plausible explanation as to why politicians continue to look the other way (See Marketplace video below). Also, in the early 2000s President George W. Bush placed a former Amway attorney in charge of the Federal Trade Commission. This was the fox guarding the hen house in the purest sense. Not surprisingly, Business Opportunity and Marketing Fraud exploded during this period (all in the name of free enterprise). Robert Fitzpatrick again comments:
“Anti-fraud law enforcement has become so lax and incompetent in recent years in both Canada and the United States that this is now the regular defense of fraudsters, including Bernard Madoff who ran a $50 billion Ponzi scam on Wall Street. Madoff mirrored Kippax when he had defended his scam for years on the grounds that "I can't possibly be doing anything illegal because the government has never prosecuted me."
Nowadays, MLMs do much (if not most) of their business in developing countries where pyramid laws are weak or non-existent (although they seem to be catching on as three Amway executives were recently arrested in India for running a pyramid scam). They promote themselves as an opportunity for the poor to move up the economic ladder but since all these firms do is transfer income from the bottom to the top, obviously these claims cannot be substantiated (As any economics 101 student can tell you, there is a big difference between creating wealth and merely redistributing it). While most people don’t lose large amounts of money, they do lose valuable time and effort that could have been used in productive endeavors (but in the case of the very poor – who are often primary targets of MLM marketing efforts -- even a “small” loss can be significant). Although focused on overseas business, MLMs are known to spread their gains charitably at home thus keeping the locals convinced that they “must be a good company because they are so generous”.
A great source of information is the Pyramid Scheme Alert. It is run by the aforementioned Robert Fitzpatrick who is the author of False Profits, an excellent book on the subject. See the link below.
http://pyramidschemealert.org/
This hilarious satire of MLM was never released to the theaters because a law suit was threatened by a deep pocketed Multi-Level Marketing company:
http://www.amazon.com/Believe-Larry-Bagby/dp/B001G5T6VC/ref=sr_1_4?ie=UTF8&qid=1369053354&sr=8-4&keywords=believe++dvd
The popular Canadian television program, Marketplace, investigated the outrageous claims of BIM. The link below takes you to that very interesting and informative episode: (BIM has since shut down)
http://www.cbc.ca/marketplace/2009/easy_money/main.html
Charles Ponzi may not have been the first, but he was the one who made it famous in Boston in the early 1900s. The Ponzi scheme is a way for an investment advisor/manager to attract more customers and more money. Funds received from new investors are used to pay older investors. With the older investors boasting of the enormous returns they received with superstar advisor Joe Bigbuck’s, more investors are attracted to Joe. This can be kept going for as long as high returns can be funded for the older investors with new investor money. This, of course, requires that new customers be brought on board in large numbers. However, with big publicity for "out smarting the markets", all these balls can be kept in the air for quite some time (e.g. Bernie Madoff).
A pyramid scheme is more complicated and is often disguised as a legitimate business opportunity. What it has in common with the Ponzi scheme is that it is a direct money transfer from one group to another. In other words, some people benefit at the expense of others (a zero sum game). Here, participants knowingly give money to those higher on the pyramid with the expectation that they will get to collect money from those they recruit as they are moved up the pyramid. So what brings in these new recruits? Greed! When they see how much those at the top of the pyramid have made, they cough up the money and go on a recruiting binge with family and friends.
Multi-level (or Network) marketing is probably the best known pyramid scheme. Okay, MLMs are not LEGALLY considered pyramids. Through massive lobby and compromise they have largely escaped the law. But that doesn’t change the fact that the economic function of MLM is that of a pyramid (in economics, if it looks like a duck, walks like a duck, and quacks like a duck, we still call it a duck even though politicians may call it a giraffe)
What differentiates multi-level marketing from a pure pyramid is that MLM involves the sale of a product. It really doesn’t matter what the product is because the product is merely a distraction. MLMs do, however, tend to invest heavily in the development of cosmetics and nutritional supplements because this allows them to make extraordinary claims -- that cannot be proved or disproved – and generate the hype and excitement necessary to charge multiple times the price of similar products. It is this difference in price that flows up the pyramid. Robert Fitzpatrick of Pyramid Scheme Alert sums it up:
... multi-level marketing schemes (MLMs), offer a "product" and claims that the "sale" of a product automatically makes them legal. Camouflaging the pyramid money through a "product purchase" and then calling the pyramid payments "commissions" is the preferred disguise for money-laundering in MLM pyramid scams. Usually the products are absurdly over-priced, not retailed, and are only purchased by the "salespeople." These purchases actually serve as "tickets" to participate in the pay-to-play scam.
So, why are people willing to pay extravagant prices for miracle skin creams, exotic juices, and honey made from super bees in the Sonoran Desert? Again, because they believe that they will be able to recruit others who will do the same.
The pyramid structure of MLM came to light in a big way when a law suit opened up the tax returns of Amway distributors in Michigan. In direct contrast to the claims of the MLM industry, only 1% (those at the very top of the pyramid) made significant amounts of money. Where did the money come from? It was a direct transfer from the bottom 99%. Where do these 99% come from? As you can imagine, constant recruiting is required to keep this going (another feature in common with the Ponzi).
Why MLM is legal has always been puzzling to me. On the other hand, it really shouldn’t be. An enormous amount of political contributions have been made by the MLM industry. This is the most plausible explanation as to why politicians continue to look the other way (See Marketplace video below). Also, in the early 2000s President George W. Bush placed a former Amway attorney in charge of the Federal Trade Commission. This was the fox guarding the hen house in the purest sense. Not surprisingly, Business Opportunity and Marketing Fraud exploded during this period (all in the name of free enterprise). Robert Fitzpatrick again comments:
“Anti-fraud law enforcement has become so lax and incompetent in recent years in both Canada and the United States that this is now the regular defense of fraudsters, including Bernard Madoff who ran a $50 billion Ponzi scam on Wall Street. Madoff mirrored Kippax when he had defended his scam for years on the grounds that "I can't possibly be doing anything illegal because the government has never prosecuted me."
Nowadays, MLMs do much (if not most) of their business in developing countries where pyramid laws are weak or non-existent (although they seem to be catching on as three Amway executives were recently arrested in India for running a pyramid scam). They promote themselves as an opportunity for the poor to move up the economic ladder but since all these firms do is transfer income from the bottom to the top, obviously these claims cannot be substantiated (As any economics 101 student can tell you, there is a big difference between creating wealth and merely redistributing it). While most people don’t lose large amounts of money, they do lose valuable time and effort that could have been used in productive endeavors (but in the case of the very poor – who are often primary targets of MLM marketing efforts -- even a “small” loss can be significant). Although focused on overseas business, MLMs are known to spread their gains charitably at home thus keeping the locals convinced that they “must be a good company because they are so generous”.
A great source of information is the Pyramid Scheme Alert. It is run by the aforementioned Robert Fitzpatrick who is the author of False Profits, an excellent book on the subject. See the link below.
http://pyramidschemealert.org/
This hilarious satire of MLM was never released to the theaters because a law suit was threatened by a deep pocketed Multi-Level Marketing company:
http://www.amazon.com/Believe-Larry-Bagby/dp/B001G5T6VC/ref=sr_1_4?ie=UTF8&qid=1369053354&sr=8-4&keywords=believe++dvd
The popular Canadian television program, Marketplace, investigated the outrageous claims of BIM. The link below takes you to that very interesting and informative episode: (BIM has since shut down)
http://www.cbc.ca/marketplace/2009/easy_money/main.html
MM
Tuesday, June 4, 2013
There
is one born every minute ...
As a faithful holder of the American Express Sky Miles Card I was rewarded with a certificate that allowed me to take a companion on a flight for a mere $99. I was planning on canceling the card but decided not to because I wanted to get that certificate. I would be taking my wife with me to a conference and that certificate would significantly lower the cost of her fare. (The annual fee was waived for the first year and one of the big selling points to keep the card -- and its $95 fee -- was the companion ticket)
The airfare to the conference was $422 each for a total of $844, but with my $99 companion ticket I would only have to buy one ticket for $422 (reimbursed by my employer) and then pay $99 ($123 with taxes) for my wife for a total of $545. What a deal!!! I would be saving $299! I was feeling like the cat that swallowed the bird. This alone would justify the $95 annual fee for the card. As long as I took my wife to this conference every year (and I was planning to do just that) I was in the black.
Oh, naive one. Did you really think that American Express and Delta Airlines were going to let you do this to them each and every year? Well, sort of. I mean, there were several hoops I had to jump through. I had to be a long standing "member" and each year if I didn't cancel the card I would get my companion certificate. It had to be redeemed 30 days before the flight and we had to stay at our destination at least 3 days. No problem. Yes! I snickered. I am going to cash in. (Plus, I'm a good person. I deserve this)
As I went online to redeem my certificate, my glee turned to "you have got to be kidding!" The flight I had chosen on Kayak was not even listed. None of the lower fare flights were listed. Only the most expensive flights were eligible for use with the companion ticket. I was given three choices, all priced at $697 ($275 more than the flight I had planned to take). Add the $123 companion fee and the total for both of us was now $820. Thus, the true economic benefit of my companion ticket was only $24 (844 - 820). I was deflated. Of course it was too good to be true. How could I have thought otherwise?
Yes, there is one born every minute and that minute it was me.
MM
As a faithful holder of the American Express Sky Miles Card I was rewarded with a certificate that allowed me to take a companion on a flight for a mere $99. I was planning on canceling the card but decided not to because I wanted to get that certificate. I would be taking my wife with me to a conference and that certificate would significantly lower the cost of her fare. (The annual fee was waived for the first year and one of the big selling points to keep the card -- and its $95 fee -- was the companion ticket)
The airfare to the conference was $422 each for a total of $844, but with my $99 companion ticket I would only have to buy one ticket for $422 (reimbursed by my employer) and then pay $99 ($123 with taxes) for my wife for a total of $545. What a deal!!! I would be saving $299! I was feeling like the cat that swallowed the bird. This alone would justify the $95 annual fee for the card. As long as I took my wife to this conference every year (and I was planning to do just that) I was in the black.
Oh, naive one. Did you really think that American Express and Delta Airlines were going to let you do this to them each and every year? Well, sort of. I mean, there were several hoops I had to jump through. I had to be a long standing "member" and each year if I didn't cancel the card I would get my companion certificate. It had to be redeemed 30 days before the flight and we had to stay at our destination at least 3 days. No problem. Yes! I snickered. I am going to cash in. (Plus, I'm a good person. I deserve this)
As I went online to redeem my certificate, my glee turned to "you have got to be kidding!" The flight I had chosen on Kayak was not even listed. None of the lower fare flights were listed. Only the most expensive flights were eligible for use with the companion ticket. I was given three choices, all priced at $697 ($275 more than the flight I had planned to take). Add the $123 companion fee and the total for both of us was now $820. Thus, the true economic benefit of my companion ticket was only $24 (844 - 820). I was deflated. Of course it was too good to be true. How could I have thought otherwise?
Yes, there is one born every minute and that minute it was me.
MM
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