Recent news on the trial of the founders of the dodgy Sunshine Empire had highlighted to me the dangers of falling prey to scams and trickery, and also left me surprised as to how many people got caught in this web of deceit; with some experiencing an almost total wipe-out of their retirement savings. It is a sad fact but a reality that a lot of people out there are simply out to con your money, and hardly are interested in helping you to grow it (in fact, they are more concerned with growing their own pot of gold). This mantra also applies to salespeople, brokers, remisiers and all those who seek to earn commissions through selling you financial advice. The term “caveat emptor” or “buyer beware” has never rung more true, and recent cases such as the Madoff and Satyam scandal only serve to highlight this problem which retail investors face. In the case of Sunshine Empire, it is my opinion that it was obvious that it was a scam, though the people who got swindled obviously could not see it as such.
One classic characteristic of scams is their ability to prey on one’s greed and desire for quick wealth. The Sunshine Empire office was beautifully decorated with expensive furnishings and the staff there were impeccably dressed and very polished in speaking (but obviously, not in delivering). The staff are trained to feed gullible investors with grandiose claims of spectacular returns and impressive-sounding projects (e.g. underwater hotel in Malaysia), in the name of conjuring up images of being vested in something lucrative and successful. Many of the victims had admitted that they were seduced by the Dark Side and gave in to greed, neglecting to do their due diligence and to check if the claims were for real. It is strange that educated people can fall prey to scams which offer a return of more than 300% per annum consistently, but I have realized that when it comes to greed and the lure of quick money, almost anyone is inclined to believe anything!
Any reasonable person on the street would be able to vouch that a return of such a high magnitude would be impossible to sustain for an extended period of time. This is because in the sale of goods and services, all businesses have to follow the basic laws of economics, which dictate demand and supply. Even if there was sustained demand for a company’s products, they have to ensure that this cannot be easily replicated by competitors and their profit margin eroded through competitive pricing. Consequently, most companies can grow at most 20-30% on average over the long-term, though in initial phases grow can be as dramatic as 100-150% per annum. Sunshine Empire did not provide a detailed prospectus or Fund Sheet or even financial statements and status updates on the projects they were (supposedly) doing. This is as good as investing your money in a hedge fund where the activities are enclosed in a black box and all you see are the reported returns. To me, this is never a comfortable way to invest when all available information is not readily supplied.
It would also have been obvious that it was a scam due to the fact that no real products were being sold, but instead rebates were given for introducing new members, giving the instant impression of being an unsustainable pyramid scheme. This is the case where new entrants pay for the profits of the older participants, who are lucky enough to exit at the top of the pyramid with supernormal returns. But the vast majority of those involved in pyramid scheme (also known as a Ponzi scheme named after the notorious Charles Ponzi) lose all or a substantial portion of their “investment”.
Ultimately, the question of human psychology comes into play. Why do human beings choose to abandon rationality and sanity when they encounter such get-rich-quick schemes, and throw all caution to the wind? I believe it boils down to the desire (in Singapore at least) to keep up with the Joneses, to get something for almost nothing, and for instant gratification. It was mentioned that a lot of undergraduates in their early 20’s and late teens fell victim to Sunshine Empire’s scam, and sad to say I believe this is the generation which has grown up to believe that money is easy to come by, and who have also been influenced by ideas of instant gratification, conspicuous consumption and “living it up”. All these may contribute to a false sense of security and a feeling of invulnerability and may make these youngsters too bold and careless when it comes to investing their money (and their parent’s money as well). Perhaps I am being too judgemental, but I feel that financial literacy and basic financial education should prevent these people from being conned. An ability to control emotions is also essential to prevent yourself from being “swayed” and influenced by these smooth, suave conmen.
So the phrase buyer beware really applies in such a situation. It is your responsibility to be careful and aware of where your money is going, and though a lot of Singaporeans claim that the Government has a fiduciary duty to protect the vulnerable retail investor, there is certainly no protection for ignorance and greed. Whether it be Sunshine Empire’s Ponzi Scheme, dubious land banking claims (from Profitable Plots) or questionable business models (e.g. Oilpods); what these have in common is that they promise a lot, but deliver precious little. It is always much better to promise a reasonable return but deliver in excess to that, than to promise spectacular returns only to burst the proverbial bubble of exuberance.