All that Glitters | Value Research Don't fall for impossible promises. Fly-by-night operators are desperate, in real estate or ponzi schemes

All that Glitters

Don't fall for impossible promises. Fly-by-night operators are desperate, in real estate or ponzi schemes

There's an economic principle that bad money drives out good money. Traditionally, it means that if you have a choice of spending a stable and valuable currency and an unstable currency, then you'll prefer to use the former.

There were historical times when both gold and copper were acceptable as currency but the gold quickly vanished into private stores because everyone would rather use copper to acquire real goods. Those who have a choice would rather receive gold. This is also the likely reason why the Government of India has fixed the price of Indian natural gas to be bought from Indian companies not in Indian rupees but in US dollars, but that's a different story altogether!

What this rule also implies is that bad investments also drive out good ones. These are times when legitimate investments are doing less well than investors expect. While equity has dawdled along for five years, in recent months, even fixed-income funds showed unexpected losses. Low interest rates -- lower than consumer inflation -- has meant that investors have been increasingly attracted to entirely unsuitable types of investments. At the first level this includes gold, and leveraged real estate purely as an investment (as opposed to use). Gold was a bubble inflated by speculation for a few years but the bubble has burst now, much to the shock of all those who had assumed that it would keep rising up at the same pace.

Somewhat similar has been the fate of real estate investments. While buying an apartment or a commercial space for one's own use is great because it saves on rent, purchasing property as pure investment by taking loans is something that worked for a while but has been the source of much financial discomfort lately.

This is specially true of those who bought real estate that had not yet been built. Some of these are also deposit schemes that are dressed up as real estate projects, as was at least one of the businesses run by the Saradha group in West Bengal.

Beyond gold and real estate, the poor state of financial investments has also driven some people to fall for outright frauds like ponzi schemes. Of these, the Saradha scam is merely the most well-known. Before that, from teak plantations to emu meat to online surveys, there has been no shortage of outright frauds pretending to be investment schemes. Part of the failure is regulatory but no matter what the shortcomings there, finally we are responsible for our own money.

This story is a part of our previous report about the need to monitor your portfolio in all times.

Other Categories