Elephants never forget

If the phrase ‘Elephants never forget’ is a maths equation than it equals to ‘Human never learn’.

When things sounds too good to be true then its likely too good to be true. However, humans never learn from it. From the internet scams to Lehman Brothers Bonds. The recent Sunshine Empire where the investors gets a regular income source from ‘investments’ & the principal is guaranteed . The Ponzi scheme of Madoff where it consistently provides an up North returns while the world is in a financial crisis.

The most recent talk about investment is on Gold. There is a particular company that pays 2% every month or 24% per year on your investment. Possible? Personally, I would not touch this & I strongly encourage my clients to walk away from it. Maybe they have a strategy to provide such a strong returns of 24% per year while the top brains in GIC are doing only 7.1% in average over the last 20 years.

Before we consider an investment to be good or bad, let us first consider these…

1) Is the returns equal to the risk you are subjected to?

Everyone  knows the theory of  ‘low risk, low return’  but not many believe in it and they think it is possible to do wonders like  low or no risk with high returns.( Those who want to understand more about ‘low risk, low returns’ may do a search on Efficient Frontier to understand about Risk.)

Can we get a close to double-digit returns if we wants capital guaranteed? If yes, why are you not getting even a single digit returns on your fixed deposits?

2) Is your returns in line with the instrument you are investing?

Let’s take two similar class of assets as example. If I had invested in a piece of land then I would not expect any form of revenue other than capital appreciation that is when I sell off my land to another party at a profit. However, if I had invested in a property, I could see a in flow of regular income through rentals. Therefore, if I had invested in land and someone tells me I can get a regular inflow of cash then I would want to know how this income source is generated.

Likewise, gold in itself is not an income generating assets. You may want to understand how the product manufacturer generates  2% regularly. Is it from a capital sales and the profit is distributed over a year or what?

3) Investor risk vs asset class.

Gold are not just equities but traded as commodities like crude oil. The underlying investment of these asset class tends to be more complicated and more risky than equities. However, most investor enter into this investment scheme mainly because it gives a guaranteed return and guaranteed capital. These are traits of a risk averse investor who would usually think twice putting a dollar on an equity but here they are placing almost their life saving in this gold investment. 

The list goes on for your consideration to decide if this is a good investment(or even an investment). It is a guaranteed profit product but the question is who is the one making the profit. You may also read more about these investment at http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={650966209-3021-6971094011}

Last but not least, most people recognise the fact that gold is an asset that is good to keep as investment as it hedge against market risk and it is the only asset one will want to have in time of uncertainty. If this is already such a great investment asset which we can easily buy in a bank, why is there a need to further enhanced its packaging? Some similarities that appears in other Ponzi Scheme like sunshine empire is that these companies will claim that they are not related to some companies that are under investigation but the shareholders of the companies are the same person.