In recent days, the local media are busy talking about a case of alleged
investment fraud by PT Golden Traders
Indonesia Syariah (GTIS), with an estimation of customer’s losses of about
Rp600 billion or US$ 60 million, and of course it is still not a small amount
of loss. But this case is the umpteenth time that happened in this country,
with an always-the-same-story: An investment fraud that promises huge profits in a short time. Actually
this case is not directly related to our investment in the stock, of course,
but I think that this is still important to be discussed to provide information
to people who may still lay about the investment itself. Okay here we go!
GTIS was once an ordinary gold trading company by the name of PT Golden
Traders Indonesia (GTI). In 2011, the company added the word ’Syariah’ (Indonesian
term for Sharia) behind its name, so it became PT Golden Traders Indonesia
Syariah (GTIS). In the same year, the company, or at least based on their
claim, obtained a certificate of ‘has fulfilled the Islamic principles’ from
the Indonesian Ulema Council (Majelis Ulama Indonesia/MUI).
Armed with the claim that their business is ’halal and islamic’, GTIS then
sell investment products through a variety of media, primarily through referral
system that every customer will be asked to look for another customer (like the
system of Multilevel Marketing, aka MLM). In a short period of only 2 years,
the company is growing very rapidly and successfully established thirteen
offices in several major cities in Indonesia, especially Jakarta. In their promotion,
GTIS has a very interesting tagline: ‘Enjoy the certainty of gain of 2% per month, just in Golden Traders Indonesia’.
And this is my comment: A certainty in gain? Are you out of mind? Since
when an investment is able to ensure the profit without exposing the risks at
all?
Back to GTIS. GTIS offers an investment product in the form of gold, whether physical or just a certificate,
with the offer of gain of 2 - 4.5% per month, payable in cash. So if you spend
US$ 10,000 to buy the investment product, for example, then you will receive a
monthly interest, or a bonus, or whatever it's called, worth US$ 200 – 450,
transferred directly into your bank account. Your ‘investment’ is secured by a
letter of buy back guarantee, where the GTIS will buy your gold back at a price
equal to the purchase price. So after a year, you will earn an interest of at
least US$ 200 x 12 months = US$ 2,400, then you can sell your gold to GTIS to get
your US$ 10,000 back. So now you have earned a profit of 24% in just one year,
without any risk of losses! Because your gold are guaranteed to be bought back
by the GTIS at the same price of your purchase price. So what are you waiting
for?
However there are some interesting things about this kind of ‘investment
product’:
First. Customers must buy gold from GTIS at a price that is higher than the
retail market price, with the difference of about 20 - 30%. This means that if
the retail market price of gold is US$ 50 per gram, for example, then the
customer must pay US$ 60 – 65 for every gram of gold they earn. There is no
explanation from the management of GTIS about this thing, but they (through
their agents) are simply say that even though the price is higher, but
customers do not need to worry, because later the company will buy the gold back
at the same price, even if the market price had fallen. The agent is usually
added that gold prices will continue to rise, so that the customer can not lose
(so once again, the risk is zero!).
Second. There is no exact explanation of where GTIS obtain funds to pay
interest to its customers. Some say that GTIS buy gold at low prices from
Untung Bersama Sejahtera (UBS, another gold trading company) and sell it at high
prices in Singapore. The profit from the price difference is then used to pay the
interest to customers. But there is no further details about this kind of
‘business operation’, and also no confirmation on behalf of UBS.
Third. Customers can only purchase the gold through agents. This agent is
usually a GTIS customer as well, where he or she obtained a commission for
every new customer that he was referring. So if you become a customer of GTIS,
then at the same time you become an agent too, where you can gain
additional benefit in the form of referral commission. But if you do not get
customers, then it does not matter.
And fourth, the customers, or ‘investors’, will be promised a higher
monthly interest rate which up to 4.5% per month, if they received the gold in
a form of certificate only! So the customer is not actually hold the gold.
Well, of the four points above, you conclusion? Yep, you’re right: GTIS is
running a Ponzi scheme. Ponzi scheme
is a fraud investment system in which the investment company will pay interest
to investors which taken from the investor’s own money, or from the subsequent
investors’ money. It was a fraud, because the funds that are raised from
investors is not used to finance a certain business to make a profit. In fact, there is no business at all. Usually
this investment offers a tremendous profit in a short time with a very low risk,
or even zero risk. Also, the customer or the investor will actually receive
regular interest payments for some time, so he then feels that there is no
problem at all, then add his investment, or even inviting his friends or family
to join. But after he had deposited all the funds he had, and also has brought
many new investors, the problem will arises, where the interest is no longer paid,
and the funds are irrevocable. Usually the investors do not know what to do, as
they invested through their family or friends, or even only acquaintances, and
not directly to the responsible person of the investment company.
Ending of an event like this is the loss
of entire fund which was invested, because the fund is stolen by the Director
or any responsible person of the investment company in question. The most
famous criminal of this kind of fraud is Bernard
Madoff, the former chairman of the NASDAQ Stock Exchange, who is now in
prison with a sentence of 150 years.
While in Indonesia, this Ponzi scheme is not a new case, but it has
happened many times only with different
packaging. You name it, Qurnia Subur Alam Raya (QSAR), Dressel Investment, Virgin
Gold Mining Corporation (VGMC), Koperasi Langit Biru, Raihan, to GTIS. In the
case of GTIS, the ’packaging’ is investment of gold. Interest paid to the
customers comes from the difference in the paid price of gold that is higher
than the market price. For customers that received the gold in a form of
certificate only, the interest is of course larger, because it was taken from
the customers’ money itself, as the gold is never exists.
Definition of Investment
On numerous occasions of my seminar/workshop, I always explained to the
participants about the definition of
investment. To put it simply, the investment can be grouped into two types:
First, the investment in fixed
assets. Fixed asset is an asset whose price continues to increase to adjust
to inflation, but the value of the asset has not really changed. For example
you buy one acre of vacant land in the hope that the price will go up in some
future time. In fact, the value of the land is not going to go up if it was not
developed (set up buildings, etc.). But if you bought the land in 1990 at a
price of US$ 100,000, for example, then the its current price would not US$
100,000, but may have been millions.
In a more narrow definition of investment, then the investment decision by
purchasing a land can not be called as an investment, but rather an action to protect the asset from inflation. If
the land is developed into a rented rooms, for example, and it make monthly or
annual earnings, then that is an investment, because the asset now provides ’dividends’
in the form of earnings. But still, this is not a ‘full investment’, because it
does not offer any increase in value
of the asset (the number of rooms will not increase), unless you are routinely
spend your earnings to build new rooms.
Second, investment in growing assets.
If you buy a pair of sheep for breeding (of course, after you appoint a reliable
breeder), then it can be called as an investment in growing assets, because the
number of your sheep will increase over time. This is what I call a real investment, since it provides two
kinds of profit: Dividends (every time you get the money from the sale of sheep),
and the increase in value of assets (the
number of your sheep will continue to grow). Also, the price of your sheep will
continue to rise along with the inflation.
However, your investment in this sheep breeding business contains several
risks that could lead to a decline in the value of your investment (read: loss).
For example, the breeder that you hired was not proficient enough, an outbreak
of the disease that causes disability or even death of the cattle, the rising of
feed prices, or a decrease in the selling price of your sheep because of a
tight competition with other farms. In essence, behind the potential profits
that may be obtained in your sheep investment above, there is an element of risks that can not be ignored. And of course,
the potential of profits and the risk of losses are like two sides of a coin
that can never be separated in any investment activity, regardless of its form.
The risks that we’ve discussed above are also included in an investment in
fixed assets. Only the difference, in investing in fixed assets, the risk is
much lower, although it does not mean zero at all. When you buy a land, then
the price will not go down unless it being hit by earthquakes or floods, or
severe financial crisis, but on the other hand there is no other profits than
the increase in price alone, and you will not obtain the increase in value or
quantity of the land. I mean, when you buy one acre of land, then the land will
remain one acre forever, and will not increase to two acres. And this is
totally different from the investment in sheep breeding where your sheep could
grow to tens or even hundreds from initially a pair only.
That's why experienced investors typically put their investment in the two
kinds of assets, namely fixed assets and growing assets. The goal is to
diversification, where the investor would reduce the risk of loss through fixed
assets, but on the other side also pursuing a substantial profit through
growing assets.
Investment vs.’Investment’
Based on the description above, an investment is an activity that meet the
following elements:
- Potential profits in the form of dividends,
interests, or earnings,
- The potential profits from the increase in
asset values (or also called capital gains),
- A real business to make the profits, and
- The risk of loss.
Well, back to the problem of GTIS above, do you think that it can be called
as an investment? Obviously not. ’Investment product’ offered by GTIS is
providing dividend/bonus/interest of at least 2% per month, but it is not clear
from where GTIS will obtain the funds to pay the bonuses, as well as no obvious
risk factors (the agent even assuring their victims that the interest will
definitely paid, bullshit). If you read again the above, one of the elements of
the investment is the potential of
profit, not the certainty of profit.
Even if you buy a legal bond that is offering fixed income in form of interest,
you still bear the risk of not gaining any interest or even a loss, if the
company was not able redeem the bond back.
In case of GTIS, it cannot be said as an investment in a fixed asset only
because the customer receives gold, as they are forced to buy the gold at a
much higher price than the market price.
(By the way, related to purchase the asset at a higher price than it should
be, then you also have to be careful in buying a land or property, if the goal
is to invest. Lately, a lot of property developers are deliberately raise the
price of their property products, to give an impression that the buyer would
benefited from the rising price of the house/apartments. However the increase
is often not reasonable as it was by design and not by real system of offer and
demand, so that some buyers could purchase the property in question at a price
that is too expensive, and eventually led to a loss).
Some tips to avoid the fraud
Anyway, the case of GTIS, including other cases of fraud investment, will
always be there, as long as people are keen to earn huge profits in a short
time. So, here are some tips to protect you against this kind of crime:
First, be careful with an offer of unreasonable huge profits. In Indonesia,
a reasonable percentage of profits for investment in any field, is between 7 to
20% per year (we do not count the bank deposits here, because the interest of
4.5% per year is too small to cover the drop in value of Rupiah because of
inflation). Including interest on the bonds is usually around 10 – 12% per annum.
Okay, I do not cover the fact that some investors in stock are able to make a
profit that is much higher than just 20% per annum. But if we use the rise of
Jakarta Composite Index (JCI) in the long term, precisely since the peak of the
financial crisis in 1998 when the index fell to as low as 276, then the average
increase of JCI in the last fifteen years (from 1998 to 2013, until its current
position of 4,825) is 19.6% per year.
So, if you are offered an investment with a return that is far greater than
20%, then be careful because of its’s possibly a fraud. Because as far as I
learned, there is no investment instruments that offer the potential for higher
gain than investing in stocks (but on the other hand, investing in stocks is
also the most risky investments among others). The ‘investment’ in foreign
exchange (forex), futures, etc., it’s not an investment, it is trading.
Two, be careful with the offer of investment which promised that the
bonus/dividend/interest will be paid in a short time, in this case every month.
Naturally, any kind of investments offer an annual income (for their investors),
and that's why companies only pay dividends once a year to shareholders, or
twice a year for a company that is completely established.
But yes, for some kind of investment there is little difference. If you place
a saving in a bank, the interest you earn is paid every month. And if you buy a
bond, you will also receive interest every three months. But how much is the interest
for bank deposits or bonds? Only 2 and 12% per annum respectively! Meaning? The
bank, or the bond issuer, may pay interest in a short time because the value of
the interest itself was very small. Meanwhile, if the value is large, say 24%
per annum as GTIS above, then it is not reasonable if the interest can be paid
every month.
And third, be careful with offers of investment that provide no detailed
explanation about the business where
your money would be put on, including no explanation about the risk of loss. An offer of any investment
that is only focused on the potential profits to be received by prospective
investors, but there is no explanation about the type and the risk of business,
even ensuring that your investment will
definitely make profits, then it is definitely a fraud! You know, any kind
of investments always bear the risks. So if your friend approached you then
said ‘Bro, I have an investment opportunity, it’s profit guaranteed! Want to
join?’, then surely he is trying to
deceive you, whether intentional or not (like the case of GTIS, he is probably
not intend to deceive you, as he was also the victim).
Anything else? Nope, that's all. One more advice so that you could avoid
this kind of fraud is, remember that something that is too good to be true, is
typically not true at all. But I am sure you have heard the phrase.
Investing in Stocks
Then how about investing in stocks? Basically, investing in stocks is
investing in growing assets: You buy shares in the hope that the value of your
asset will rise in line with the increase in the value of the company, that is
reflected in the increase of the stock price, plus profit in a form of part of
the company generated net income (dividends). But of course, you cannot buy the
shares at an overvalue price. The
increase in the value of the company is usually derived from retained earnings
that are used for business expansion, like make a new office, setting up new
factories, hire more employees to increase production, etc. The increase in the
value of the company (which is then reflected on the increase in its stock
price) is called capital gains.
But make no mistake, there are also Ponzi schemes in the stock market,
although with a little different mechanism if compared with the case of GTIS
above, namely: Some people can make the price of certain stock soar, so that he
made big gain in a short time, not from the increase in value of the company,
but from other investors who buy the stock later (at a high price). So you
could say that the gain derived by investors who had bought the stock from the
beginning, was obtained from the losses suffered by investors who buy the stock
later. This kind of ‘fraud’ is called stock
bubble.
So how to avoid such fraud? Well, we’ve discussed this many times on this
website, try your search.
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