Category: Investing Insight

When you read about Ponzi schemes, “chit funds”, teak plantations, ULIPs, variable annuities, etc… you might be led to think that these are because people don’t know any better. So maybe we only try and educate them, they’ll know how to spot these scams and stay way from them. However, that doesn’t seem to be the case.

Ponzi schemes are everywhere

You would think that in the US, after all the billions of dollars spent on education, regulation and enforcement, people would know better. From ponzitracker.com:

“Real” Finance is strange

Morgan Housel at fool.com:

The Behavior gap is as wide as ever

In the US, over the past 20 years, “equity fund” investors achieved an average 5.02% annualized return, which is 4.2% less than the 9.22% that he/she could have achieved by simply investing funds in an S&P500 index-tracking fund.

Investors chase performance. Here’s how Vanguard simulated performance chasing behavior in a recent study:

Initial investment: At the start of the analysis period, we invested in any fund in existence for the full three-year period from 2004 through 2006 that had an above-median three-year annualized return.
Sell rule: Using three-year rolling periods of returns, we moved forward one calendar year at a time. Funds that achieved below-median three-year annualized returns at any time were sold, as were funds that were discontinued.
Reinvestment rule: After any sale, we immediately reinvested in each fund that achieved an average annualized return within the top-20 performing funds in the style box over the prior three-year rolling period.

Here are the results:

Sounds legit

Real Step Pashupalan brought to you by Step Up Marketing Pvt. Ltd (SUMPL) (Source)

And if owning goat certificates is not your thing, how about real estate? Viswas Real Estates and Infrastructures India Limited (VREIL) came out with these gems: (Source)

• Own Your Property Advance Scheme Monthly Plans
• Lumpsum Property Advance Schemes
• LPAS-MIS Platinum Plan, and
• Own Your Property Advance Scheme (Daily) Plans

It was sort of like a layaway plan for real estate combined with insurance. The customer pays a monthly installment of 500/- which at the end of the year becomes 6,000/- which is the total property advance paid. On this amount, the estimated compensation value (ECV) is 600/- and thus, the refund amount with ECV after one year is 6,600/-. On receipt of the total advance amount, VREIL executes simple mortgage deed (without possession) in favour of the investor. VREIL also offers insurance coverage in conjunction with its schemes.

Yes, regular people invested in these plans and SEBI recently busted them.

Conclusion

Regulators and policy makers would do well to study the behavioral and psychological forces that cause investors to make irrational decisions. The focus so far has been on the brain, it should be on the investors’ hearts instead.

Found an interesting paper (scribd embed below) where the authors hypothesize that superstition may be a symptom of a general cognitive disability in making financial decisions.

The authors constructed a “superstition index” and bucketed traders based on their trading activity in the Taiwan Futures Exchange. They found that the superstitious individuals (the top-quintile of the superstition index) under-perform their non-superstitious counterparts (the bottom-quintile of the superstition index) by 1.6 basis points within a trading day. The under-performance widens to 2.4 basis points for one day and 6.3 basis points for five days after the transactions.

Here’s an odd titbit: Did you know that India’s Independence Day falls a day after Pakistan’s because astrologers in India insisted that August 14, 1947, was an inauspicious day to become independent?