Friday, 9 October 2009

Too Good To Be True?

Yesterday I posted a blog about what appeared to be a sure fire investment scheme. Today I can reveal what was going on.

I offered two things - 1) was a chance to invest £100,000 to 1,200 subscribers to my plan and I would return then after just one week of using their money, the entire amount plus a further £20,000 - no risk and tax free and 2) I was offereing a share in the 'idea' of the plan at £1,000 a pop to up to 1,000,000 shares under a normal investment scenario.

Of course I had a point. The point being the the plan seemed too good to be true and most people rightfully ignored it as such.

I received some replies on the investment in the plan, but only one on the 'share' in the idea. There was a reason behind that and it was at the heart of what was really a Thought Experiment and a piece of fun.

In reality, the investment plan has some credence. You see, if I had all the investors I needed I would have at my disposal £120m. The chances of winning the Euromillions lottery is around 1 in 76m, so the cost to buy 76m tickets each with a unique number to exhaust all the permutations would be around £114m, leaving me £6m to buy a range of insurances against having to share my winnings, either through spread betting or simple insurance. I would then wait until the value of the Euromillions draw was around £150m (remembering the largest it has been is €183m so far) and then I would call the cash and buy all the tickets - having signed each subscriber as member of my legitmate lottery syndicate for tax puproses. I probably would never even have used the money as the pledges could have secured a loan to the value for a single week and I might have raised more to cover the costs of the scheme legally and technically as buying all those tickets quickly would have to be done automatically. The payouts to the investors would be £144m, leaving me a further £6m in profit.

Thus, I would guaranteed to have at best won the jackpot outright and at worst have shared the winning number with someone else, which would have to be paid for by the insurances or the loan I raised.

The share scheme in my idea was unattractive as it would raise £1bn for a scheme that may or may not be able to be repeated.

OK, here is where I was coming from. On paper, it looks as though I have a scheme that really does guarantee a return fast - remember it is only one week of money use for 20% tax free and no risk. In some respects this is analagous to the whole financial system. It is a seeming no-flaw scheme to make money. The only risk comes in if many people start to do the same thing and prizes are shared. But the concept is always about hitting the jackpot and so the lure to the investors is focused around their winning without regard to anything else. The analogy is not a good one but it does show a flaw in thinking and this is the disease that the financial system has - inside there is a flaw in logic. You cannot keep having money and gaining profit when there is nothing under-pinning it.

Except, of course, insurance. You see, the whole system is propped up by insurance and hedging. Without it, there would be no financial system. The trouble is, as we saw in the credit crunch, if the financial system fails then the call on insurance would bring us all down. The concept of insurance is that it calculates risk - but the whole financial system had become so incredibly risky, but apparently profitable, that all previous forms of risk calculation went out of the window and it became nothing better than betting on horses or daft lottery schemes.

Interestingly, my unpopular share scheme in my idea would have raised £1bn. This I liken to the background amounts required to underpin the whole plan I had. I only wanted to raise around £120m but I would need a great deal more to cover my losses if the whole scheme unravelled. Think upon this as being the money we have pledged as taxpayers into the global bank bailouts. It's an unattractive, unwise investment and it remains at risk all the while someone like me is using my plan to make money. While I am winning, it's great, but all I have to do is lose and the situation changes drastically.

You see my scheme was designed to be repeatable. As long as Euromillions exist, paid for by millions of chancers, and as long as I can raise money on the pledges of my subscribers, then I can play as many times as I like absorbing losses going along. And anyone can play - there is no patent on this scheme so as long as you have people who will subscribe the £100,000 for their return, you will find that everyone can play. Indeed, if all I am doing is raising loans to play, then to continue all I need to do is one enough each time I play to cover the interest on all the borrowings to pay out. Of course, the profits are far less and in reality, the returns cannot be sustained for one reason.

The Euromillions lottery kitty is not growing. The whole scheme needs the available total payouts to be growing in line with the profits being made. But that would not stop the scheme from working and being sold, you simply no longer rely on subscribers' cash pledges to raise you money, you can 'sell' the share in the profits as the pledge for cash. As long as no-one really analyses what you are doing and there is a 'herd mentality' that says, 'If Goldman Scachs are doing it then it must be ok', then no one need stop and explain to investors that there are no real underpinning assets to the whole idea. You are simply trading on the 'thought' of a guaranteed return on your money.

I bow to those who would easily see the flaw in this whole idea. I would also wish that those who see the flaw as clearly as I do would go back and take a long hard look at the financial system. If I can see the flaws, then so should they.

Government, bankers, economists - all of them - have systematically ignored the obvious which is wrapped up in the professional image of murmuring 'suits' in the financial centres of the world who tell us that greed is good.

My illustration tells us that it is easy to stop the flaws if you are prepared to look for them. My point here is that if a banker came along and told you about a 'structured investment tool' to make you money, you would believe every word.
After all, bankers wouldn't let you down, would they? What, they did? So why did we all save them? Heck, buy my scheme anyway - at least I'm genuinely stupid and so have an excuse.

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