Blog 8 Ponzi Scheme

Time passes with lightning speed, the module has come to an end by the time I am writing this last blog. In this blog, I am going to discuss about Ponzi scheme which is related to the ethic issue in business. Ponzi scheme has happened over and over again around us and every time it packaged the idea very well and perfect, but it seems too good to be true for me. I recall that one of the famous Ponzi scheme that happened back in my country, Malaysia about few years ago and it has been collapsed last year. The name of the scheme is called “JJPTR” and the meaning behind of it is simply means “saviour of ordinary people”. They were so many people invested their money in it and it was so famous by the time. However, the result was pretty clear that many of those investors lost their money when the organisation faced collapse.

So why is there many people still fall for the trap even so many cases had happened? I personally think that it I because the Ponzi scheme is so attractive and the best selling point is to “get rich quick”, with an irrational rate of return up to 30% or even up to 50% with an extremely low risk. Thence, the so called “investor” would invest their money in it and hoping for a crazy return in a short period of time. However, it is not appropriate to fully blame on the investors because the directors behind the scheme were too brilliant and competent to cover up the scheme and making it looks flawless.

Speaking of Ponzi scheme, I had to mention the largest scheme ever which found by Bernie Madoff, the Madoff investment scandal. He defrauds the investors by misleading a message saying that the money is invested in shares and securities. However, the truth behind it is that the money was not invested in the market, instead Madoff used the capital from new shareholders to pay returns for the previous shareholders yet keeping the rest of money as profits for the company and himself. Similar to other Ponzi scheme, the game will just keep repeating and repeating to the point that when the new shareholders’ capital is unable to repay for the returns of the previous shareholders, hence the party will stop and leading the organisation to collapse and game over. In this case, Madoff revealed the truth behind his investment company was actually a Ponzi scheme when he was unable to repay the returns for new shareholders in year 2008. The total amount of the fraud was estimated at $65bn and he later sentenced to jail for 150 years. Well, this is so long and he could probably pass away in the first few.

After a few paragraph of a short intro Ponzi paragraph, you might wonder what is it to do with the business ethic? Here come a few important points how Madoff investment scandal erodes the business ethic and the first one is definitely fraud conducted by Madoff. Madoff and his fellow employees from the investment company had conducted fraud by misleading the investors and results in breaking the business ethical responsibility which is not desirable. The unfavor act causes the investors to losses their hard earned money which is not in line with the business ethic.

Furthermore, the second business ethic issues concern with Madoff investment scandal is the misrepresentation of its business where Madoff was deceiving the investors by telling them that his company was actually making profits by investing in shares and other securities. A business with ethic is supposed reveal its real affairs instead of misrepresenting to attract investors. In addition, Madoff had also committed money laundering which would erode business ethics and consider as crime at the same time. He was covering up the illegal revenue generates from the Ponzi scheme under his investment company to hide from Government.

Last but not least, organisations must follow and apply the business ethic to maximize stakeholder’s value and avoid themselves from any unwanted unimpressive events because in the end, the harm that they bring will come to themselves as well.

Blog 7 - The Great Crash 1929

The reason why I picked this particular finance documentary is because I believe that not much people would be taking it because history is boring, isn’t it? Especially something that happened about a century ago. However, if we look at this with a different angle, something that happened in the past is actually beneficial for us as a guidance.

As mentioned in the documentary, the so called “investors” were speculating on the stocks market, even the celebrities. In fact, they were making decent profits for their speculation. This can be explained by when the stock market is on a bull trend, the confidence of all investors is very high and results in pushing the share prices to go up. However, the speculators on stocks would be wiped out immediately during a bear market as the confidence is relatively low hence there is no buying power and causes the shares to decline drastically. This can be link to the current situation of stocks market where there are so many uncertainties over the economics and political issues such as the Brexit, US and China trade war, fluctuations in oil price and etc. When there are uncertainties over the financial world, the confidence of investors is rather low thus they would move their capital to the “safe zone” such as the gold commodity. Therefore, it would lead to a fall in equity market and it can be seen in the Dow Jones index, which has dropped for almost 20% from its highest point recently.

One thing that I have to mention from the documentary is that investing with margin is a double-edged knife. It could benefit you by leveraging your capital and profits but it could also be a very dangerous tool as your losses would be “leveraged” as well. In the 1920’s, investors can just leverage their investment with margin for a ten-fold where $6,000 of capital can purchase shares up to $60,000. This is very crazy and dangerous especially for speculators who doesn’t even concern what were they buying, they have no idea what are the industry that the company is in, the business and whatsoever. They would just invest their money in whatever seems right and ignore any other matters. Without a question, they could still generate decent profit during the bull market, but let’s imagine that when the bear market is in control, the outcome is obvious that the bankruptcies were just occurs everywhere which has happened in the great crash of year 1929.

Consequently, the overly speculations had caused a gigantic bubble on the stocks market but the investors were just ignored the fact and chose to continue the party. For my understandings, the share prices were far beyond its intrinsic value and it could be corrected at any time, before the investors could even realize. The profits that they enjoyed during the bull market was so high, it reaches the point that they would just simply neglect the risk behind it and causing a tragedy to happen. This is very similar to the financial crisis took place in year 2008, everyone is just celebrating for the large profits and blindfolded for the bubble caused by over leveraging.

In short, we must learn from the past and avoid the mistakes that made by ancestors. I am certain that there will be another, and another financial crisis happens in the future, just like the one in year 2008 because the tragedy in history is easily forget by humans, especially when there is another bubble rising up. The only thing that we can do is to take precaution step to minimize our losses and always perceive risk at the first place.