Academy for Wayward Authors: What Ponzi Schemes Reveal About Our Own Business Systems

The evolution of the Ponzi scheme

In Game of Cults, I introduced you to a con man and a hustler.

I didn’t mention the eponymous scammer, Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, AKA Charles Ponzi, the person we associate most with pyramid schemes. This is the scheme where a person pays older investors with newer investment money, and there is usually some embezzlement along the way.

As I write this, Sam Bankman-Fried is sitting in a Bahamian jail awaiting extradition to the United States. He is now on a path to joining Ponzi and Madoff as being known as just another scumbag who ripped off unsuspecting people.

But what if there is more to the story?

Back in Ponzi’s day, the primary method of communication was mail. There was a method for getting international mail sent called an International Reply Coupon (IRC).

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This system involved member countries that allowed an IRC to be bought in one country and then exchanged for stamps in other countries. This created an arbitrage situation in which an astute person could buy an IRC in one country, redeem it in another, and profit from currency exchange and the different valuations of postage.

When Ponzi started, he wasn’t looking to scam people; he was looking to grow an IRC arbitrage business. He said if you gave him money for forty-five days, he would provide a 50% return, and if you held for ninety days, it would be a 100% return.

There were a few problems. If you looked at the money being invested, there wasn’t any way the IRC system could support the number of coupons he needed to buy. The IRC system was designed for post offices to work together to get mail from one country to another, not become a speculative market. For all the investors to make money, there had to be buyers, and there would be too many coupons purchased versus actual users willing to pay. Then, there was the issue of moving the coupons; it would have taken the entire cargo bay of a steamship to move the coupons he was selling each week.

Here’s the crazy thing: Ponzi believed in what he was selling. He had bought into the idea and hype of IRC as a way to make money.

It was only after he took the first money and realized how hard it was to buy and then resell the IRCs that he switched to a pyramid scheme.

Guys like Ponzi, Madoff, and Bankman-Fried don’t start out as crooks. They slide down a slippery slope when times get tough and turn criminals digging out of the circumstances.

It’s an excuse, but it’s also a very common situation to find yourself in. The situation of doing things that aren’t beneficial because it seems like the only way out of a bad situation.

By no means do I suggest you’re doing anything criminal, but you may find that you “have no choice” to do something as a short-term fix.

I know this because I’ve been there. I inherited a family business. Because of my emotional connection to it, I did things to keep it going in the short term that were really bad business decisions in the long term. Along the way, it cost me a lot of money and countless sleepless nights.

In the end, it was a failure that taught me the tough lessons that made me a better business operator.

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Some of you reading this may be in a similar situation right now. You have been piling time and money into your business, but you have ended up with bigger losses and more stress.

What you’re facing is a phenomenon known as the sunk-cost fallacy. This is the tendency to persist and continue to invest in something, despite its diminishing returns, simply because of the resources and time that have already been committed to it.

It’s a cognitive bias that can be difficult to overcome. However, it’s important to recognize when enough is enough and not make the decisions others (like me) made to rectify a bad situation.

I bring this up for several reasons. First, this is a tough industry with one of the greatest washout rates around. Then there is the issue of those trying to recreate past growth bubbles, or the fallacy that there is endless upward growth forever. Not in publishing; it is a cyclical industry.

I told you we were shifting into your course track for building a business system. Now that you’ve had eleven weeks of thinking about and working on yourself, you may find yourself thinking differently about your business and what you want.

In the words of Martha Stewart, “That’s a good thing.”

Starting this work now that you’ve had this shift can save you time and effort in changing plans and priorities.

I’m not trying to discourage anyone from their dreams. Rather, I want you to look at where you are and see if you are doing the wrong things for the right reasons.

We all lose sight of where we are in pursuit of a goal. Maybe you need to reassess the goal and where you are at.

Could your shadow bully DMN and the groupthink of the author community have led you into a situation that will bring you no joy in the future?

Take this week to assess where you are and where you want to be in twelve months. As you assess where you are, consider what capital you have at hand.

Don’t be discouraged and say, “I can’t do what I want with this little money I have.” Instead, imagine what a silent giant would do with that money to move closer to your larger goal.

See how that feels.

Read: Hunting for Profit in the Publishing Wilderness