Suspected Ponzi strategy: Invest early, take all dividends
Here's how to make good money from a suspected Ponzi scheme. Invest early, take all dividends, and never put too much into it.
Whatever you do, don't be among the last to invest: chances are your money will go to earlier investors. Don't treat it like a bank deposit - where shrewd investors let the interest compound year after year. In the days of high interest rates it was difficult to beat the returns available by simply letting money accumulate in a higher yielding bank deposit.
Among the scores of stories surrounding the David Ross group of companies - which receivers have said has the characteristics of a Ponzi scheme - is that some invested say $20,000 when the fund started around 1990, and reinvested all returns year after year. With early dividends said to have been as high as 30 per cent, their investment could have grown to be worth hundreds of thousands of dollars. These people would have recommended the Ross group to friends and clients reporting that they had done spectacularly well.
They're now among the 430 investors wondering where the money went - and if they'll get any back, after the substantial costs of the liquidation. If they're positive thinkers they can console themselves by saying they "only" lost $20,000, their original investment.
But this would be small consolation, knowing that till recently they could have extracted all their money - as some may have done. About $67 million of the $450m in the funds were withdrawn over the past two years - a ratio similar to most funds. Some of this may have to be returned if the investment returns are found to have been fictitious.
Others who didn't withdraw money - but paid tax on it - face the challenge of getting it back from the IRD if it was deducted before they received it in dividends or other distributions, or where tax was taken under foreign investment rules.
No-one likes admitting they've lost money - be it on the sharemarket, the TAB, or the $100 that some spend weekly on Lotto tickets. Perversely, the same people will be happy to skite to friends, and the media, when they have a big win. Understandably most of the people who lost money are keeping their heads down. They should be grateful that Palmerston North investor Bruce Tichbon, who had invested $1m with Ross, is acting for them and trying to get information about the missing millions, including about the worryingly high costs of the liquidation, as he told Kathryn Ryan on Radio New Zealand.
The investment world is awash with rumours about who might have lost money. An extremely wide range of people invested, some losing between $8m and $10m. Rumoured investors include a prominent company chairman; members of some of the country's most prestigious golf and gentlemen's clubs; owners of classy homes and apartments in Wellington, Tauranga, Christchurch and Auckland; and Manawatu, Wairarapa and Canterbury farmers - including one who lost heavily in the Lloyds insurance problems in the 1980s.
One wealthy man, with many other investments, was so happy with his returns that he advised his sister, when she retired, to invest all her savings "with David".
Mr Tichbon says that there were many smaller investors, including whole families whose children were saving for university. He said in later years returns were not high, "below market at around six per cent". It has also been reported that nothing had been paid on some investments lately.
I've known David Ross from the 1970s-80s when he was involved in high flier fund Leadenhall, which was effectively rescued by a division of the National Bank in 1990.
Around that time he invited me to be an early investor in his new investment company. He is not the tall, flamboyant type portrayed by one Auckland report, but a low key, affable figure who hovered in the background, keeping his own counsel, at investor briefings. This image of a canny, sociable Scot, with a reputation for maximising returns, obviously encouraged investors.
He had a reputation as a top rate stock picker, especially among small "penny dreadful" stocks where prices are extremely volatile, and substantial sums can be made by buying and selling at the right time. The past decade couldn't have been more difficult for players in this sector. It has been reported that the group's cash flow problems dated back to 2000, coinciding with the dot.com crisis. Things may have worsened since 2007 when the biggest gains have been among boring, quality utilities and similar stocks that have the financial strength to survive and pay good dividends.
There is a place for risk takers - look at the money Kiwi investors in IT stocks like Xero and Diligent have made.
Lessons from the problems facing this David Ross company are that people shouldn't put all their eggs in one basket - or invest too much in one firm. I wonder why more people don't invest on their own behalf, where the securities are safely held under their own name and direct control.
PS: I politely turned down David Ross' suggestion to invest with him in 1990. I was wary of his former connection with Leadenhall, but long ago formed the conclusion that I can quite easily lose my own money - without paying someone else to do it for me.