Part 1: Investing Behavior
An investor’s attitude towards a risk greatly determines investment decisions that are to be made in business. While a majority of investors shy away from high-risk ventures, a smaller percentage of entrepreneurs choose to be high-risk takers. In this case, I am a high-risk investor willing to take profitable ventures after careful market research. This means that I am prepared to expose my portfolio to significant risks. I accept the high volatility in order to expand and facilitate my capital growth. In this regard, I am looking forward to invest in riskier shares and in emerging markets of young firms where shares are higher than bonds.
Despite seeming unrealistic, the unwavering desire and will of individuals to invest in their wealth is immense. In most cases, they are often involved in funding startups with expectations of gaining value in their money. However, the strategies undertaken classify them as different individuals recognized in business. As a result, companies should take out precautions before reaching out to investors. In this case, banks are considered as investors by providing loans for startups regardless of whether collateral is provided or not ( Ke & Sieracki, 2018) . On the other hand, angel investors invest in projects they are passionate about. In most instances, they are already successful and ready to develop and advance their line of professionalism.
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From a different perspective, peer-to-peer lending is also a type of investment where similar business or entrepreneurs venture into a particular business. However, they would have to share their financial interests before working together. In contrary, venture capitalists invest on a less frequent basis as compared to angel investors. They invest in equity capital in situations where the values of their purchased shared increase over time. This means that recipients of funds give a partial ownership of their business to them ( Ke & Sieracki, 2018) . At the same time, family and friends may invest in startups particularly when it is starting a new company from the ground.
Risks are inevitable but high-risk investors choose businesses that have high uncertainties. According to the assessment test, I should consider investing in dynamic ventures where despite risks being high, the opportunities are beneficial. High-risk investments are those that there is a high chance of capital loss or underperformance ( Ke & Sieracki, 2018) . I should start young due to compound interest, manage expenses, and diversify in order to balance risks and returns. This means that I should save a little as 20% in cash and invest the rest in different assets such as stocks and bonds. It would be best to own many securities than invest on a few due to the uncertainties of the market performance.
Despite being a high-risk investor, I am keen on carrying out market research before undertaking any investment. At the same time, I have also found out that my profile changes as I age. This is because the more I age, the more I gain professional experience in financial markets. As a result, I tend to move towards riskier ventures such as investing in newer markets as opposed to before. My profile would, therefore, assist both me and my investment advisors in choosing the right venture to invest in. At the same time, my profile would enable us to be keen on market dynamism in order to determine how the investments would be.
Part II: Recognizing Fraud
According to Seth (2018), pyramid schemes are unsustainable models of businesses that operate by increasing the number of people at different levels by paying upfront costs that would attract promised payments. Given their illegal nature, they are often considered illegal in many countries. The more one recruits a person, the more they earn money. Unlike multilevel marketing programs, they are illegal and usually founded with the aim of stealing money from its members. In this case, one is likely to lose money if signed up for the scheme.
Recognizing pyramid schemes may not be easy but accurate once an investor carries out adequate research. This is because they are in most cases similar to network marketing programs where membership may pose as gift promotions and chain emails that follow formalities of any business. The income of a member depends on the number of people invited to join and the amount of money they pay when joining (Jhaveri, 2014). Unlike network marketing, income is not based on product sales but on membership. At the same time, the schemes require people to buy a lot of inventory. Also, members are often forced to buy things that they might not want in order to maintain good standing with the firm. the rags-to-riches stories or portrayals of lavish lifestyles should also be an indicator of a possible pyramid scheme (Jhaveri, 2014). The stories told may not demonstrates the actual lives of majority of the members. Doubt should be exercised to establish the legality of the programs.
Pyramid schemes are often unsustainable since there is no value created in the invested money. Money invested does nothing but simply waiting for more money to be added. Therefore, the systems give no benefits or motivation to support the system. Instead, false promises are given as future prospects of there being very high returns that are normally unattainable in normal business. Victims of such schemes are at every socioeconomic level, age brackets, and educational level (Keep & Vander,2014). Members are often affiliated with previously targeted victims, tied to the scheme through organizational association, and are already involved in legitimate businesses.
Part III: Famous Scandals
As one of the most famous pyramid scheme scandal in America, many are left to wonder whether Madoff is a criminal or just being smart. The scheme was identified by Harry Markopolos who was a financial analyst and portfolio manager at Boston. He alerted the SEC about his suspicions after trying to replicate Madoff’s returns. It was impossible to deliver as Madoff had alleged and highlighted 30 red flags ( Azim & Azam, 2016). Victims included individual investors through organizations, banks, hedge funds, universities, and wealthy individuals.
Investors’ bias contributed to the fraud when they failed to carry out numerous research about the program. Given that he was the head of NASDAQ, members of the scheme were assured of legitimacy and legality where they would get value of their invested money. His largest Ponzi scheme in U.S. history involved securities, investment trust funds, mail, and wire frauds alongside money laundering. On the other hand, the Ponzi scheme had two classes supported by both the SEC and the SIPC after the SEC encouraged the growth of unregulated feeder funds after liberating the rules of investment ( Azim & Azam, 2016) . The senators accused the SEC of giving too much freedom to the scheme and trading without investigating Madoff business. Despite a series of red flags, the SEC failed to identify the fraud due to ignorance that led to disciplining of around eight employees.
Conclusion
However, since not every investor may meet the qualifications of an entrepreneur, it would be wise to investigate the investor’s management style and values to eliminate future problems. Businesses should avoid investors who are frequent litigators since they might intimate one to gain more control of the funds. Businesses should also avoid investors who take control of important strategic decisions. They should also look out for fraudsters whose aim is to defraud entrepreneurs who are not keen.
References
Azim, M. I., & Azam, S. (2016). Bernard Madoff’s ‘Ponzi Scheme’: Fraudulent Behaviour and the Role of Auditors. Accountancy Business and the Public interest , 1 (1), 122-137.
Jhaveri, A., (2014). Telltale signs of a pyramid scheme. Federal Trade Commission. Retrieved from https://www.consumer.ftc.gov/blog/2014/05/telltale-signs-pyramid-scheme
Ke, Q., & Sieracki, K. (2018). Exploring sentiment-driven trading behavior of different types of investors in London office market (No. eres2018_112). European Real Estate Society (ERES).
Seth, S., (2018). What is a pyramid scheme? Investopedia. Retrieved from https://www.investopedia.com/insights/what-is-a-pyramid-scheme/
W. Keep, W., & J. Vander Nat, P. (2014). Multilevel marketing and pyramid schemes in the United States: An historical analysis. Journal of Historical Research in Marketing , 6 (2), 188-210.
