The week of Ponzi Schemes
It’s upsetting when I read about financial advisors that steal money from their clients. This week there were two different Ponzi schemes uncovered that targeted unsuspecting clients.
The first Ponzi scheme was a former math teacher that defrauded her clients. Most of the victims were teachers themselves. This advisor promised high returns if they invested in an unregistered company. The private company eventually went bankrupt and her clients lost everything. The second Ponzi scheme was the largest ever to hit Maryland at an astounding $364 million. These three advisors bought mansions, 20 luxury cars, diamonds, and other lavish items. This dirty bunch sold debt portfolios consisting of credit card, auto, and student loans among other things. Most of these ponzi schemes almost always have the same thing in common, promises of high returns for taking very little risk. The easiest way for an advisor to pry on new victims is to promise an easy way to get rich quick.
This post is not about how to identify and avoid bad financial advisors. Most of my readers are clients, so they already understand the importance of a third party custodian and working with a qualified and experienced advisor. There is no doubt that other ponzi schemes are happening at this moment. But there are other ponzi schemes happening right in plain sight that are easy to spot. Cryptocurrencies come to mind as a massive ponzi “like” scheme that the government failed to stop. Most people that bought into cryptocurrencies knew it was some type of ponzi, but they thought they could get out in time after making profits.
There is another massive ponzi scheme going on in many popular marijuana stocks. I’m finding many similarities between the investors in cryptocurrencies and marijuana stocks. The common thread is that these speculators pay ZERO attention to valuation. These investments don’t fit the definition of a ponzi scheme, but I believe they are close cousins. You need to find another investor to pay more for an investment at a higher price. Both will collapse if new money doesn’t materialize and they are illiquid at the very core. It’s the classic greater fool theory.
There was a marijuana stock this week that went on a rollercoaster from around $115, touching $300 in a few days, only to finish the week at $123. At the high, the market capitalization of this company hit $27 billion. Gross sales last year for this company was only $20 million. To put this absurdity into perspective, a $27 billion company should generate around $1.2 billion in profits every year. For those investors that are buying in hope of striking it rich, they will need that company to sell a ton of pot! This was so foolish that I’m surprised the SEC did not stop trading for a few days. I highly doubt that any of the speculators in this stock ever cared to look at the financial statements and could even tell the difference between a cash flow statement and a balance sheet. An analyst went on CNBC’s “Closing Bell” and summed up the insanity the best by stating that owners of this stock were effectively buying air.
There is a investment warning in all of this stupidity. It’s that all bull markets and market cycles come to an end when silliness takes hold. Massive speculation is the ultimate killer of all bull markets. You can begin to tell when the market party is getting into the late hours when you start to notice all of the drunken fools. My advice for any speculator buying into a $27 billion marijuana company is to donate the money to charity before it goes up in smoke.
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