Thread by @_groww

In 1882, a boy named Charles was born in Lugo, Italy.

His family was not wealthy and was going through a rough phase.

(Thread)

But little Charles always liked money.

He moved to Rome to study in a university there but he never did well - something he himself admitted.

While in university, he spent most of his time in bars and cafes with his rich friends.

At that time, Italians were migrating to the USA in search of economic opportunities and Charles jumped on a ship too.

On reaching the US, he looked for odd jobs in the city of Boston.

He worked as a dishwasher, waiter, busboy, and several other odd jobs but he got kicked out of each of these roles in a short duration.

Charles then moved to the city of Montreal in Canada where he had found a new opportunity - one that he hoped would allow him to get rich.

The new job he got was that of a bank teller.

Charles was a suave man. He was charismatic, spoke three languages (English, Italian, and French) and people enjoyed his company.

He quickly rose through the ranks in the bank.

The bank he was working at offered a very high-interest rate to its customers.

More and more depositors invested.

But unknown to them, the owner of the bank was paying off earlier investors with money gotten from new investors.

This was only going to last so long.

One sudden day, the owner of the bank fled with the money to Mexico leaving the investors with no money.

Charles was empty-handed too.

Desperate for money, he forged a cheque and got caught, and was sent to prison for 3 years.

After that, Charles returned to Boston, USA.

Here, he found another trade that he hoped would earn him big money.

He started trafficking migrants from Italy illegally. He was caught and sent to prison.

Then, he came out and tried to live a life away from trouble.

Charles fell in love with a woman, got married, and worked as a bank teller.

He quit and took over his father-in-law’s fruit business.

Then he moved on from that because none of the roles really worked for him.

It was at this point that he discovered IRCs. International Reply Coupons.

They’re postal stamps accepted internationally and they cost the same everywhere.

But due to different inflation in different countries, you could buy cheaper from some countries and sell them at a higher rate elsewhere.

This was an arbitrage opportunity.

Charles got into this business.

He used his money and made good returns.

He tried to borrow money from banks so he could make even more money but they flat out refused.

So he collected some money from his friends and family.

To them, he promised extremely high returns. Double in 90 days.

They agreed.

Before he could reach the end of the 90 days period, some more people heard of it and asked him to take their money.

He did.

Using the freshly collected money, he paid back the first few investors.

Now, you had a bunch of investors who had been paid back - people who had actually made money from Charles’ scheme.

Charles was very smart about his offers. He never pushed people.

The way it would work is, he would make a casual mention of the work he did in conversations.

If someone was interested, they’d ask him for more information. If they didn’t, he left it there and didn’t try to bring it up again.

To those who’d enquire to learn more, “IRCs”, he’d explain patiently.

Here’s the thing about knowledge.

If you don’t know anything about a domain, anybody speaking confidently to you will sound like an expert.

Most people had no clue how these stamps’ arbitrage opportunities worked.

So they believed him.

Charles wouldn’t just take someone’s money. He’d usually accept only if they really requested and pleaded to them.

His sophisticated mannerisms, charismatic personality, and seemingly good knowledge won him the trust of investors.

There’s a famous scene in the movie American Hustle that seems like the exact representation of the above.

Mind you, at this point, he’s not making money from the stamps. He’s just taking money from new investors and giving it to older ones.

Because he promised such high returns, every round, he needed many more new investors than the last round.

This, thankfully for Charles, wasn’t a problem.

Word kept spreading and more investors started giving him money.

At the height of his fame, he was earning $250,000 in a day, in 1920!

A newspaper covered him and all hell broke loose - people lined up outside his house to invest.

He bought a palatial house, and a beautiful limousine - true to his lavish style.

His arrogance had reached such a peak, he bought one of the banks that refused to give him a loan.

He even bought another company just to be able to fire his ex-boss.

People would ask around about how these things work. Nobody knew how it worked.

But a few of the early investors had made money so they served as social proof. Humans are social animals. They fell for it.

Eventually, it blew up - there is no other way these things can go.

He was sent to prison.

Investors lost 70% of their investment.

Charles came out after 6 years.

His name was tarnished in Boston. So, to start a fresh new life, he went to Florida.

There he started a real estate business.

He started selling land.

Most of this land was underwater - in the swamps. Investors, just like before, had fallen for his tactics again.

He was caught again and imprisoned.

When he came out of prison, he was deported to Italy.

There too he started a few scams, fled to Brazil, and died of old age in Rio de Janeiro. He had only enough money to cover his own funeral.

Now, this is always going to be a tricky matter.

New investment opportunities arise once in a while and people have to depend on someone else’s expertise to make decisions.

What’s the way out?

How can we choose someone to advise us correctly?

For most things, a reasonable level of knowledge should be developed in each of us.

You might not be a doctor but if a fake doctor told you that your fifth kidney has a stone in it, you’d know they’re lying - we have only two kidneys - this much, everybody knows this.

Similarly, most of us cannot be full-time finance professionals.

But most of us can have a basic level of knowledge and understanding so that it is more difficult to be cheated.

With a matter as vital as money, it makes sense to develop a baseline level of knowledge - just as many of us do with matters of our health.

But then, there can be new forms of investment or niches within existing investments that we know nothing about.

What about those? What can we do then?

In those cases, you must remember, when things seem to be too good, they might just be too good.

And, if you must take advice, make sure it isn’t from someone who is also trying to sell you the investment.

There are some red flags that should definitely make you alert:
-High returned promised with low risk
-Investments in unregulated spaces where there's little legal protection
-Guaranteed returns
-Short period where the window to investment vanishes very fast

Depending on the situation, there can be more red flags. Analyze carefully whenever you're investing. 

A missed investment opportunity is better than money lost forever.

What Charles did - collecting more money from investors to pay earlier investors - is a scam.

It has to blow up.

This is called a Ponzi scheme.

It’s named after Charles himself. His full name was Charles Ponzi.

He succeeded because he was the sole expert and advisor in whatever investments he sold.

https://twitter.com/_groww/status/1411280661667741698?s=19