Ponzi Scheme

If a person or a company has many investors for a period of time and it takes money from the new investor and pays the old investors without making money from selling its products or providing any service to the customers will definitely in long term go bankrupt and end up cheating their customer. This is called Ponzi Scam or Ponzi Scheme

This is noticed in few businesses in late 19th century, however the name ponzi was well known when Charles Ponzi carried out this behavior in United States in early 20th century. He Mainly concentrated on getting new investors and got their money and paid his dues and old investors without carrying out actual business, this was later identified and penalized

Charles Ponzi

When investing, one should watch out for this Ponzi activity and be very careful before investing in any company. By reading the Annual statement of a company, it can be easily identified, we should concentrate on the 

• Cash flow of the company
• What is the debt of the company before and now
• How that debt's are handled 
• How are revenue and profit generated 
• Does the customers accept the price of the products ?
• Does the tax paid are in par with the industrial standards 

If a company generates more income than the competitor company, then the company to be analyzed well, before investing in it. I'm not saying wrong about any company which generates more income compared to industrial standards but we should not fall into trap like satyam scam and so on

Dividends are important, most investors get attracted to companies which pay good dividends but one should also analyze how those dividends are paid to its share holders. Is it taken from the profit generated by the company ? or it is given by adding new debts ?

Analyzing on the behavior of any company's CEO is crucial important. If the top management has a greater vision for long term, it is ok to compromise few percentage on dividends and returns in short term, else it is better to avoid such companies

Let's say if the CEO of the company has less salary compared to its competitor company but he / she has greater share holding percentage in the company, this means the top management believes in the long term value of the company than the short term benefits, this kind of company is better for investing

It is always important to understand if the company is behaving in any of the schemes like Ponzi before investing, company should generate its profitable income by selling its products or providing service to its customer, this will generate wealth

Have a Great Day

B G Nareshkumar