What is a Ponzi Scheme?
Most of us have heard of the term ponzi scheme, and some of you may have been tricked by one. Not to fear, these “businessmen” that start ponzi schemes can often be quite tricky. A ponzi by definition, involves investment of “client” money for investors that are seeking a substantial return. The early investors are paid off as new capital enter’s the ponzi scheme. Historically, these usually fail, because if the “manager” can not trick any new investors to inject capital into the company, then the old investors cannot be paid off (remember there is no actual business here!, just money changing hands). Unfortunately, these managers will often spend the money during the scheme and this is how many people have lost billions through ponzi schemes.
Bernie Madoff: An Example
Many know Bernie Madoff. Which is a shame as society should not make famous those that do such awful acts. However, all should definitely know what Madoff did in order to protect themselves. Bernie Madoff started a ponzi scheme through his wealth management practice, ending in losses of about $18 billion for investors, many of which were innocent elderly that were looking for income to live their last years. As usual with ponzi schemes, he failed, but not after many years and many losses for investors.
How About A Pyramid Scheme?
A pyramid scheme is very similar to a ponzi scheme and the difference between the two is really semantics. A pyramid scheme is supposed to involve an actual product that is being sold, in which new “employees” are hired, and need to pay upfront the enter the pyramid. They then receive the product and can sell it to others, and also get others to sign up, and they will receive part their sign up profits. The main reason these are fraudulent is because deception is used. The owners may have no real intention of selling a product, but as long as new “employees” continue to sign on, they will make money.
Business Lessons Learned:
The lesson here from a business and financial standpoint is obvious; in order to be successful and financially well off, one needs to create something of value, or add value in any way possible! You need to add value to this world in order to find success in this world. Think of any successful person that you know. Whether it is an actor, an artist, a politician, a sports player, or a business titan, they added a lot of value to many people’s lives, and brought their talents to a global scale. If you take nothing else away from this article, take away the fact that you must add value to succeed, and if you are thinking of starting a ponzi scheme, good luck, but I promise that you will fail.