Articles

Poverty Is Necessary – Part 1

In “Talking To Strangers”, Malcolm Gladwell wrote about our tendency to “default to the truth.” Humans have a proclivity to believe the best in outcomes even when facts say otherwise. The facts are glaring but we fail to admit them. Our tendency to default to truth might be as a result of limited financial education or maybe nothing more than sentimental reasons, but we sure do default to the truth.

Harry Markopolos in the financial thriller “No one would listen” wrote extensively about Bernard Madoff, the Wall Street financial Czar responsible for the 50 billion dollars Ponzi scheme. Let’s take a deep dive into the Madoff story. Madoff was a man many would regard as ” the prince of Wall Street” in his heydays. He served on the board of some of Wall Street important industry associations, moved within the monied circles of New York. He was imperious, reclusive and charming, one who could do no wrong.

His Hedge fund; Bernard Madoff Investment Securities LCC continually beat the NASDAQ industrial average for years leading many Corporates, Foreign banks, High Networth Individuals(HNI), charities to invest in the fund. Madoff’s hedge fund was alleged to have about 4,800 clients with an estimated value at 64.5 billion dollars.

If you are like me, you must be thinking, how did he pull off such a heist? Unlike other Ponzi schemes, this lasted for over twenty years. Wall Street firms employ some of the smartest people on the face of the earth, how did this escape their attention. One of the firms that invested in Madoff’s fund was Renaissance Technology. RenTec, as it is fondly called, was founded in 1982 by James Simon’s, an award-winning mathematician. As of June 2019, they had 110 billion dollars Asset Under Management (AUM)

RenTec has a large retinue of individuals with PhDs in mathematics, finance and economics from ivy league universities. You can’t argue about their brilliance and sophistication, but how did they miss this? The answer lies in our tendency to “default to the truth” in the face of glaring facts. RenTec trusted the system above basic facts.

In Kalu Aja words, “Ponzi Schemes are like musical chairs, when the music stops, don’t be the investors without a chair.” What does the above quote remind you of? Our present-day cryptocurrency referral and forex scams. They guarantee investors high-interest rates for their investment. It is important to state clearly, cryptocurrency trading for all intents and purpose is not a scam but any scheme or platform that guarantees a fixed rate for an instrument that is hugely subject to volatility is a scam.

Poverty is necessary is an attempt to understand Investors behaviour in a third world country like ours. Why do seemingly highly educated folks fall for the sophisticated shenanigans of Ponzi Scheme merchants? If Rentech with its sophistication fell, why won’t you? Could it be the allure of massive gains? I think so. What would constitute as due diligence in investigating the authenticity of investment vehicle?

Shaun Tully at Fortune Magazine nearly 20 years ago coined the term “HENRYs “(High Earners Not Rich Yet). HENRYs are Millenials who earn between 100,000 to 250,000 dollars per annum. That’s supposedly high given out current reality as a country. For the sake of this piece, I will adjust the parameter to relate to our reality. An honest assumption would be folks who earn between 2 to 10 million naira per annum.