by Martin Chapman

Created on: January 30, 2009   Last Updated: July 20, 2010

The young often see previous generations as being less sophisticated. Indeed every 20 years a new generation seems to forget the lessons of the past. The economist John Kenneth Galbraith said just that, in an interview on the1929 Stockmarket Crash. The victims are waiting and all they need is an unscrupulous charmer to relieve them of their money.

Bernie Madoff was another Ponzi scheme operator, no matter how sophisticated the financial experts claim it may have been. Investors were shown to have been too willing to believe in the myth of Hedge Fund outperformance, irrespective of rising or falling markets. The Madoff scheme attracted attention because affected investors all over the world, but many had forgotten the Pyramid schemes of 10 years ago which cost many Eastern Europeans their savings.

Any decent professional fund manager would tell you that you should not always believe that a business is a safe investment just because it  has shown rising profits for 5 or 10 years. You have to know how these profits are being achieved. As a certain Indian software company recently showed, it is easy for somebody to falsify the numbers. This is just what Madoff did.

The legal jargon is called "Caveat Emptor", which means Buyer Beware! If something appears to be too good to be true, then it probably is. For example, Goldman Sachs continued to increase their profits, while their peers showed losses and went bust. However, nobody was asking any questions. Then suddenly Goldman Sachs was asking the Government for assistance and got it. Something was wrong there, just as Madoff's numbers continued to rise irrespective of financial market conditions.

Ponsi scheme operators are usually smooth customers with expensive tastes in clothes, cars and offices. They want to sell you and image and they are effectively saying that you should cast in your lot with them and that you should all have one purse. These are the people, who Solomon warns us about in the Book of Proverbs. Psychological profiles of people like Madoff, do not help much, as that there are always professional fraudsters. Those operating from "Boiler Rooms" in Spain, selling unlisted US securities, will make a hard sell on the phone and tempt you initially with share prices pushed up with investors' money, but which you will later find impossible to sell.

Recognizing how the "pyramid" functions is the key to avoiding them. The chain letter scheme

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