Kam Raslan’s Talking Edge

(Reprinted from The Edge – Options pullout, 20 October 2014 issue)

Dear Kam,
Is it my imagination or is the world falling apart?
Doomed

Clearly, the world is falling apart. Ebola, ISIS/ISIL/IS, Hong Kong, Ukraine/Russia, MH17, MH370 and the continuing obvious signs of the degeneration of Malaysian politics. I just watched a video from Penang where a small anti-sedition demonstration was abusively broken up by a group of men demanding, well, sedition. They shouted, “Balik! (Go back!)” Who were supposed to balik and where they were supposed to balik to was unclear, but I have my guesses. I still don’t understand what sedition is, but its ironies keep piling up.

Clearly, the world is falling apart. Or is it? No newspaper ever had the headline, “Nothing important happened today” because nobody would want to buy that, even though it neatly describes most of my life. Horrible headlines capture eyeballs, and now that Facebook has become the main news curator, we can find ourselves enjoying pictures of cute kittens and then be suddenly confronted by a picture of a beheading in Syria. Even our moments of escape are being invaded by real-world horror.

As for Malaysia, just like everyone else, I too am sickened by people throwing around disgraceful and incendiary words as if our country were an unbreakable toy. I take these words very personally. Am I supposed to balik somewhere?

Malaysia can be broken, but ultimately, I think there’s a good chance it won’t be. I believe that the main continuing themes of Malaysian history are consensus and symbiosis, and I think that people who want to break that are attempting to go against the thread of our collective history. People who throw around disgusting words are relying on everyone else’s common sense to make sure their words do not actually become a reality.

But realities can change, words can take on a life of their own, and they can gather their own momentum.

Dear Kam,
What is a Ponzi scheme?
Novice Investor

I could try to write a short definition but it could never be as concise as the one on Wikipedia: “A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organisation, pays returns to its investors from new capital paid to the operators by new investors, rather than from profits earned by the operator.” I didn’t need to describe a Ponzi scheme to readers of The Edge because you knew that already, and obviously, none of you is actually running a Ponzi scheme. I hope you’re not running a Ponzi scheme.

Small-time investors in Malaysia are constantly being stung by Ponzi schemes. I don’t know if Malaysia is above the global average, but I can’t help feeling that we are. Ponzi schemes promise, and for a short time, can even deliver amazing returns. A recent scam based in China netted over 100 Malaysian investors, with promises of 100% returns in two years. This sounds too good to be true and, of course, it was too good to be true. Warren Buffett says that investors in US stocks can expect returns of 6% to 7% and that anybody looking to double those gains must be “dreaming”. How can anybody fall for crazy promises of 100% over two years?

I wonder if Malaysians are particularly susceptible. In 2013, Malaysia’s household debt stood at a record 86.8% of gross domestic product, growing 12.7% annually from 2003 to 2013. I must admit that I just said a bunch of things I don’t really understand, but I do know that Malaysians are increasingly living in debt. Credit cards are easy to get, wages are fairly stagnant and costs are going up. Oh, and we do have a political class that might talk about the need to tighten belts but doesn’t exactly lead by example.

Malaysia, unlike China or Indonesia, has a long history of middle-classness. We know what middle-class looks like. We know the things you have to own, the places you have to travel to and the education your children must have in order to be middle-class. I think Malaysia is essentially middle-class. If, for China or Indonesia, the desire is to push upwards into the realm of middle-classness, then, for Malaysia, the fear is sliding backwards into genteel poverty. And that makes Malaysians particularly susceptible to Ponzi schemes.

A con man wants everybody to join his Ponzi scheme, but he might well prey on small peer groups, and his tool is trust. This is called an “affinity fraud”. Retirees, religious and community groups are particularly vulnerable. These are closed groups, financially fearful, unlikely to do any research on the Internet and crucially they trust each other. If the con man can persuade one or two trusted individuals to join, then the entire group can be infected with ease. I spoke to somebody recently, who was tempted to invest in an obvious Ponzi scheme, and her reason was that Auntie so-and-so had joined, so it must be legit. The sense of safety is enhanced because there must surely be safety in numbers.

Ponzi schemes will probably increase as costs go up and the Malaysian middle-class becomes impoverished. I keep hearing of “investments” that are so obviously Ponzi schemes and that are so out in the open, and yet I don’t understand why the authorities have not stamped them out immediately. Perhaps “get rich quick” is an essential part of the Malaysian Dream. We see so many people who have become immensely wealthy, sometimes through hard work and an actual product, but far too often the origin of their wealth is a complete mystery. If they can do it, then why can’t I?

Ponzi schemes collapse whenever the market slumps. The con man is found out because investors suddenly need their money back, and there are no new investors to cover the withdrawals or give the promised returns. But if the con man can secure more funds, then the scam could continue. If the con man can source the finances of a friendly bank or even a government, then the scam could theoretically continue for a very long time. Unfortunately, the financial black hole will become so big that it would require all the money in the world, and that won’t happen. Eventually, all Ponzi schemes come to light because there will always be market crashes and there just isn’t enough money to cover them.

One of the sad aspects of Ponzi schemes is that the perpetrators usually start the investment funds with the best of intentions. But not everybody can be Warren Buffett and soon the fund is not making the promised returns. Money is moved about to cover the hole. It’s only meant to be temporary because the next bet will fix it. But it doesn’t, and a Ponzi scheme is born. The perpetrators often become bewildered by their own shame. They double-down and spend, spend, spend as if there is no tomorrow because tomorrow must never come, tomorrow is inconceivable. It always does come and the scam is always discovered. And if the scam is truly big enough, then we all pay the price.

Reprinted with the kind permission of