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How to avoid pyramid schemes – Wanjira Wanjiru

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Photo by Elijah O’Donnell on Unsplash

Around mid-June last year, I received a rather exciting call from my cousin. He told me about a lucrative investment opportunity he had discovered. The investment was in forex trading. He had been investing in it for 3 months and since it had proved to be a legit investment, he had recruited his wife and other close friends to invest in the same. At the time, the only thing I knew about forex trading is that it involves the exchange of foreign currencies. He told me that the investment had a return of 20%. This 20% of one’s investment is paid every month forever. Investors are also encouraged to keep adding to their investment. To start, my cousin encouraged me to invest a minimum of KES 100,000.

I put my phone on loudspeaker, opened the calculator app and started calculating 20% of KES 100,000.

“If I invest KES 100,000, they will deposit KES 20,000 to my account every month?”

He responded with a resounding “Yes.”

“How long will they keep depositing this money to my account.”

“Forever, or for as long as you’re an investor with them.”

I had landed a goldmine. Everything about this investment had a ‘financial freedom’ ribbon tied to it.

I asked my cousin to share the company’s website so that I could read more on it. When he said it over the phone, I remember thinking ‘that sounds like a pyramid scheme.’ I laughed but my cousin reassured me that as much as it sounded like a ponzi scheme, it was a legit business-he had invested with them for 3 months and they had paid him the 20% without fail.

“What happens if it turns out to be a pyramid scheme and I lose my money?”

“If it turns out to be a pyramid scheme, you will be among the winners since you’ll have joined early. Most pyramid scheme losers are the ones who wait it out. To minimize your risk, since I have recruited you, I will take 5% of your commission. If things go south, I will pay you the principal that you had invested.”

This is the kind of assurance I needed in order to invest. I felt calmer and ended the call by asking him to text me the name of the website.

If you’ve been in such a situation in the past, you know how exciting it can be. Sweaty armpits. Building castles in the air as you imagine what that kind of money coming through monthly can do for you. Endless prayers to the Almighty thanking him for bringing you such an opportunity. Gratitude for having such people as my cousin who points you in the right direction. And mostly pride, pride in yourself for being smart enough to recognize such goldmines that could mean not having to persevere the torture of having a normal job. A perfect example of laughing all the way to the bank. Aren’t we always taught to take advantage of opportunities in a swift manner?

Wealth that stayeth to give enjoyment and satisfaction to its owner comes gradually, because it is a child born of knowledge and persistent purpose. — George S. Clason, The Richest Man in Babylon

As soon as he texted me the name of the company, which he did within a minute of ending the call as he didn’t want me to miss out on this lucrative deal, I went online and checked out their website. I’d be lying if I said I understood a single statement on that site. Everything was vague and I could not make out exactly what they did or how they made money (both their money and the money they claimed to pay to investors.)

I’m a sucker for clarity when it comes to communication; whether written or verbal. That I could not understand what I read on that site was the first deal-breaker for me. I felt agitated and called my cousin to express my disappointment. Again, he assured me that there was nothing to worry about, that all I needed was to send him the KES 100,000 and wait for 30 days to receive my payout. It was a tried, tested and real investment.

I didn’t have such an amount of money in cash, savings, emergency fund, loaned to people… I didn’t have it. In fact, I’d never had such an amount of money just sitting in an account waiting for such opportunities to present themselves. This lack was a blessing because had I had it, I’d have immediately sent it to him.

I sent my bestie a message and asked him to loan KES 100,000.

“Hahaha, Aggie, you and I have never loaned each other more than 10,000, how can you randomly ask for such an amount?”

I went ahead and gave him the details of the deal and sent him the link to the website as a way to convince him to loan me the money. A few minutes later;

“After reading through this site, did you understand what these people are doing or what business they’re in?”

“No. But my cousin assured me.” I said

“What business/career is your cousin in?”

“He’s a web developer.”

“Then he does not understand forex trading and he shouldn’t be recruiting you. I will not lend you the money because you will soon lose it and you will not be in a position to pay me back.”

I will no longer lend any of it where I am not confident that it is safe and will be returned me. Neither will I lend it where I am not convinced that its earnings will be promptly paid to me. — George S.Clason, The Richest Man in Babylon.

Turns out, my friend had working knowledge on how forex trading works. He was able to immediately flag out the bullshit on the site.

Ignorance, as they say, is bliss, I still wasn’t convinced. I googled for reviews of the company and yes, I found red flags all over the web of experienced investors calling it was it was, a pyramid scheme. Tried my luck again with my friend and this time, he taught me that loaning money among friends and family is about trust. It takes time to build this trust. You cannot randomly ask for such an amount, you have to start with a small amount, prove your ability to pay on time and keep building the amount.

I called my cousin and told him that I was convinced that it was a pyramid scheme and I wasn’t going to invest, with a heavy heart as I was already counting my losses.

An important thing to note is that, if I had the money, I would have invested, not because of the returns, but because I trusted my cousin’s opinion. A dangerous move in investing; never invest in anything you don’t understand.

The bubble burst last month, Feb 2020. My cousin lost 1.2 million of his own money and about 400,000 he owed to people he had recruited. Not only did he lose money, but he was also left in deep debt.

He called me to inform me about his loss and to congratulate me for being smart enough to dodge that bullet. What he didn’t know is that I didn’t dodge because I was smart, I just didn’t have the money at the time. I outsourced the brainwork from my friend who refused to loan me and had forex trading knowledge.

My cousin might have made this mistake, but he’s made other successful investments in the past and I’m proud of him because he recognized his mistake when the company went under and is diligently paying back the money he owes the ones he recruited.

Which is why I never give express investment recommendations

Lesson from bae about investments in Africa

Lessons learnt from this experience

  1. “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”

I had all the red flags that this was a pyramid scheme. My cousin said that the company encouraged people to recruit others in order to earn a commission, they promised a 20% gain to be paid out every month in perpetuity, they needed investors to sign up asap, etc

  1. Arm yourself with money principles through reading, conversations and experience.

Gold flees from the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment. — George S. Clason, The Richest Man in Babylon

This and other principles of money will save you during such conversations or when presented with such schemes that are dressed as opportunities. I shared the rest of the principles in my previous articles on getting 1% better with money every day.

  1. Work towards having a calm mind.

A lot of bad investments are made when extreme emotions are involved, in my case above it would have been extreme excitement, building castles in the air about something I don’t understand. People are currently out here doing fear stock dumping due to the coronavirus pandemic. The smart ones are adding stocks to their shopping cart, right there after toilet paper. As Waren Buffet said “The stock market is a device for transferring money from the impatient to the patient.”

I invest in a calm mind through reading, exercising, taking time to understand investments, currently studying accounting, and being a nuisance to the world by asking multiple questions.

  1. Independent thinking

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” Warren Buffet.

On that note, I deliberately don’t give direct investment recommendations. Do your homework.

  1. Do the basic housekeeping with your money before you start investing.

By the time my cousin was pitching this deal, I was still stuck in debt, had no savings, no emergency fund, no working knowledge in investing. And here I was shamelessly asking my friend to loan me more money.

Starting with the basics of money (getting out of debt, learning how to save, creating a practical budget, building an emergency fund…) will give you enough experience and exposure to inform your decisions for the bigger investments. Take the stairs, not the lift.

  1. Don’t invest using borrowed money, especially if you’re a beginner.

I can see you recalling the advice you’ve read on good and bad debt. If you haven’t learnt the basics, then you have no business taking up debt to invest.

  1. Avoid money management companies.

Quote from JL Collins

  1. Consult knowledgeable and experienced people.

My cousin had no knowledge or experience in forex trading. I didn’t either. My friend did, he saved me from loss.

Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in it’s handling. George S. Clason

  1. Ignorance is big business for financial institutions.

In his book, A Simple Path To Wealth, JL Collins talks about his first credit card payment. In his first month of owning a credit card, he spent $300. The bank only needed him to make a $10 minimum payment. He was beyond elated, that he had been out and about swiping his card all month long and he needed to do was pay $10? He writes;

“Fortunately, my older sister was sitting nearby. She pointed out the fine print. The part about them planning to charge me 18% interest on the $290 they were hoping I’d let ride. What? Did these people think I’m stupid?

As a matter of fact, they did. It was nothing personal. They think the same of all of us. And unfortunately, all too frequently they’re not wrong. For marketers, it is a powerful tool. It allows them to sell their products and services far more easily, and for far more money, than if it didn’t exist.”

Flee from anything or anyone that promises you fast riches. Learning about money and wealth-building ‘is a slow procedure, for one must live.’ If you choose to master it, money becomes a wonderful servant. If you don’t, it will surely master you.

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