One of Webster’s online dictionary definitions of a bubble is ‘a thin film of liquid inflated with air or gas’. You see a solid and attractive round object, you reach for it and by the time you get your hands around it, the bubble bursts. There is nothing inside – a hollow filled with air. Outward appearances deceived you.
There are also financial bubbles. A new investment comes to town. It is easy to enter, and the returns are better than what the market is offering. You buy low and before you say jack, the price doubles, and triples.
Financial Bubbles manifest when the price of an asset trades in a range far above its intrinsic value. You are paying for more than it is worth. In some instances, by the time the bubble bursts, you may not even find someone a buyer. It becomes a worthless piece of paper. In a financial bubble, investment becomes the rave of the moment, and everyone seems to want a piece of the action. It happens with some stocks in the stock market, real estate market, and new investment schemes that are the rave of the moment for some time and you don’t hear about it anymore.
You may be wondering what the difference between a scam and a bubble is. With a scam, there is an intent by the promoters to be fraudulent while a bubble is an investment that is not backed by sound fundamentals. The promoters may mean well, but the numbers don’t just add up. A scam is also a type of bubble.
Financial bubbles are not new. Sir Isaac Newton lost money in one of the reigning investments back then that came to be known as the South Sea Bubble (1711 – 1720). I had my baptism in the mid-1980s when I invested in ‘bonds’ issued by shadowy characters while in the University. Many have since come and gone – Planwell, Umanah Umanah, Forum (everybody come inside), Nospetco (who claimed they were investing in oil and gas), MMM, etc. There was a stock market bubble 2005/2008 and a real estate bubble around 2010. We still have all manners of schemes today, some under the cloak of economic empowerment.
Each time they show up, there is a group of people ready to fall into its sharp claws, driven by a combination of greed, economic hardship, and naivety. Some go in knowing full well it is a scam and will soon crumble, hoping to go out before the roof caves.
For those who sincerely have no idea and desire to learn, I want to share ways you can identify financial scams, and bubbles and avoid them.
It sounds too good to be true
If it sounds too good to be true, it usually is. When you see rates of returns above and beyond the normal range, that is a red flag right there.
What type of business can sustain such a funding model?
What is the source of income to pay the promised rate of return?
Why would someone source for funds at 200% per annum or above when the banks borrow funds at a much lower rate?
The is a new way of making money now
Most scams show up donning the robes of innovation. A new paradigm is in town, and the old is about to give way. Just join and bring others in, and you will make residual income. A few excited early adopters join and spread the message. Someone once told me she no longer invests in fiat currency. She has migrated to the crypto universe.
Not all new ideas are wrong. We need new ideas. We also need a reality check. Common sense should not be dispensed with. Success without work is a fantasy. Few are willing to pay the price necessary to succeed. Thinking that you will succeed simply by bringing in people is a mirage. There are fundamental principles that cannot be broken.
Everybody come inside
That was the battle cry of Forum. Everybody will make money. Finally, we have a scheme that will make everybody rich; a scheme rich people do not want you to know about because they don’t want you to join their exclusive club. You don’t need to think –bring your money and invite others. Really?
That also happens in repackaged conventional investments like real estate, commodities, forex, etc. All you need to win is to invest, and returns are guaranteed. Just switch off your brains and come in. I remember a marketer trying to get me to buy investment real estate. She promised the value of the property would double in two years. I asked her to put that in writing with a money-back guarantee. That ended the sales presentation.
The investment goes viral
When an investment becomes the talk of the town, your alarm bells should go off. When an investment turns into a gold rush, and everyone is looking for money to take invest, many hearts will be broken.
Usually, the pioneers get early results and go to town with the news. The euphoria spreads and everywhere you go, people are talking about it. There is a go-slow at the payment counter. They want in too. Some skeptics get off the fence to get their piece of the action. If it is stocks, real estate, etc., the price shoots to the skies as demand booms. Everyone is a winner. What can be better than that?
Delay in payments
As with all bubbles or scams, the inherent contradictions catch up with it. The money from new ‘investors’ is no longer enough to meet the cash flow required to settle maturing ‘investments’. Payments get delayed. There is a new queue, this time for those wanting to cash out.
Excuses are provided – network issues, system upgrades, someone is not around to approve some documents, etc. The bubble is about to burst. For other types of investments, the expected results do not materialize. Factors that were not discussed when you are signing up come into play. Out comes the small print. For promoters of Ponzi schemes, it is time to pack up their briefcases and melt away in the darkness, to lie low and set up shop somewhere else.
Buyer’s Remorse
After the crash, everyone vows ‘never again’ and scolds themselves for falling so cheaply into an obvious trap.
Investors lick their wounds while the promoters smile to the bank. For a while, you think common sense is back in town. Behold, the mushroom pops up again, and a new scheme is in town. History repeats itself. How come some fall into the same trap several times? You wonder. The answer, my friend, according to an old song, is blowing in the wind.
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