HOW TO TELL AN INVESTMENT FROM A SCAM

Last week arrested the Charles Lambert Nwabuikwu, a Nigerian born Briton who through his Development Channel promoted a Ponzi scheme that came crushing down months after it was opened. But not before he had separated hundreds of Ugandans from their hard earned cash.

In another news event National Social Security Fund (NSSF) announced that the option to take out their accumulated savings in phases was open for those who qualify to withdraw their savings.

A saver with NSSF who attains the age of 55, is rendered invalid, leaves the country or attains the age of 50 and is out of work for a year qualifies to withdraw their savings. However it is not mandatory that they withdraw it all in one lump sum.

The Fund’s research has shown that after barely two years of withdrawal of their savings about four in five people are totally broke and have nothing to show for the windfall. Popularising the partial withdrawal is their way of guarding against this for other members.

The challenge with happening upon a huge sum of money, we assume that because we have a lot of money we have now become super businessmen or have become investment experts. We labour under the widely publicised illusion that the solution to our money problems is more money --  “If we had more money our business would survive/thrive”

Here are a few common sense tips is you fall into things, NSSF or otherwise to determine an investment from a scam.

1.       How do they make money

If someone approaches you with a investment or business proposition understand first how they make money. Most propositions are a variation of the buy low, sell high theme. So they will buy maize, beans, coffee, whatever at price X and sell its (X+costs +100) shillings, which 100 shillings they share with you. If you understand the way the business works you are off to a good start. That is why you are advised to invest in what you know, it saves you the learning curve that comes with costs.

2.       What is their experience

Management is everything. You can have two businesses in the same industry, one thrives while the other struggles or collapses. More often than not the difference in their respective fates comes down to the management of the businesses. Do the people you are handing over your money to have any experience in the business they are hawking? In this case the experience you are looking for is that they know how to make money doing the business, not just that they worked in the industry as employees or managers.

3.       How long before you get your money back

The promoters of Ponzi schemes seek to dazzle you with this in the hope that you forget to ask the hard questions above.

Development Channel for instance was selling tablets for sh750,000 with a promise of a monthly payment of sh350,000 a month for life. This a return on your money of 460 percent per year. What this means is that you will get your money back in just over two months. Is this a fair return or not? The best to know is by comparing with other investment opportunities in the market.

The safest investment in the market are treasury bonds and bills, these represent debt the government borrows from the public.  As of November 7^th an investor can earn an annualised 11.25 percent on the 91-day treasury bill and 17.50 percent annually on the 15 year bond.

So far these are safest best in the market, meaning that any investment proposition should promise you, better still pay you higher than these rates. The higher the risk the higher they should pay you.

So when Development Channel comes along and pays you more than 20 times what the government is offering you alarm bells have to go off.

Two questions immediately arise, how risky is this business that they are willing to offer so much and secondly, remember whatever they are paying you is after they have taken off their own cut, that means the business is actually showing a higher return than 460 percent! What are they dealing in to show such returns? Drugs? Black dollars?

If you are in doubt about the returns see #1.

4.       Does the “investment” bring meaning to your life

And if you have convinced yourself of the above the final test would be whether this investment is in line with your morals, does it have meaning for you. So for instance out of religious convictions you might not be interested in investing in money lender or banks or condom factories.

Of course the more money you have to invest the more detailed the vetting process would be. If all the above four criteria are met to your satisfaction only then can you begin to consider the investment if it is one.