75

A significant portion of my girlfriend's family have fallen for, what seems to me, an obvious ponzi scheme.

They take money, in cash, to a casino in the area. They give the casino the cash, and one month later get 150% back. This amount is always handed back to them in cash, which they immediately reinvest. Some of them have been doing this for years.

My girlfriend, being a reasonably sensible person, has had no intentions of participating in this until recently. She now needs to save up some money for next year and is seriously considering putting her life savings into this scheme.

What are some strong arguments against participating in something like this?

Edit: This is a 'legal', fairly large casino. The casino has a story about using the money 'invested' as a float for Singaporean billionaire gamblers. No apparent strings attatched to the money. The idea is that you can take it all home straight away.

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    If it is a legitimate casino, and the family has been doing it successfully for years, are you sure it is a scam? When you say “they immediately reinvest,” Do you mean that they immediately hand the cash back to the casino? Which casino is it? – Ben Miller - Reinstate Monica Sep 4 at 11:40
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    While this deal indeed sounds too good to be true, the question does not contain nearly enough information about the system to write a good argument against it. I think we need to know more in order to clearly show "the catch" of this arrangement. Is it a ponzi scheme? Then it wouldn't go on for years. Is it some illegal money laundering scheme? Perhaps, but we don't have any proof. Is it a confidence scam? Did anyone ever tried to not reinvest the money and cash out? What happened? – Philipp Sep 4 at 11:41
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    @BenMiller To me, this triggers too many red flags to not be a scam. Working in cash only, the 50% p/m guaranteed returns, not certified with their country's security and exchange commision. Yes, they immediately hand the cash back to the casino. I'm not sure whether they've ever tried taking the cash home first. I'm not sure which casino (I'll check with my girlfriend when she gets back). – Omegastick Sep 4 at 12:02
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    The numbers here don't add up at all. If I invested one single dollar with a 150% monthly ROI, I'd be a millionaire within 3 years and a billionaire within 5 years. Unless everyone in her family very recently became millionaires, it should be clear that it doesn't actually work this way. – Nuclear Wang Sep 4 at 14:14
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    The question can't possibly be accurate. A total investment less than $100 wouldn't be worth worrying about and the minimum amount of time you can describe as "years" would be two years. But if the description is accurate, $100 would become over $1.5 million in two years. There's no way anyone who invested just $100 is being shown over a million dollars in cash, told it's theirs, and not taking at least $100,000 out. Turning $100 into a $100,000 seems very much unlike a scam and not something to complain about. 50%/mo is quickly unsustainable even for a ponzi scheme. – David Schwartz Sep 4 at 15:28

11 Answers 11

157

What's Wrong With Being a Turkey?

One of our dear friends comes to us to seek advice, since we seem to know a thing or two about money. Our friend just so happens to be a turkey - a particularly great turkey, thank you very much, so don't judge.

Our dear turkey friend is being told by all their friends that there is this incredibly friendly butcher they know, and believe it or not, as much as you might have heard rumors to the contrary, this butcher loves turkeys! Day after day, month after month, they visit this butcher and are given an incredible deal that is impossible to beat. In exchange for spending a little time with the butcher, they are given free food, shelter, warmth - all a turkey could possibly ask for!

Time after time, all the turkeys have had an absolutely wonderful time with the butcher, and have nothing but good things to say about them. All their turkey friends - including some very sophisticated, street smart, and well-educated turkeys - who have spent time with this butcher report only great experiences.

economic analysis of the prospects of a turkey

Now our turkey friend is feeling pretty bad about this whole thing. They are out, working their lives away for chicken-scratch like a sucker! Why shouldn't they get to wet their beaks, too? If this is a turkey-loving butcher, then why shouldn't they get the same great deal all their turkey friends are getting?

Now, from our perspective, the problem of our turkey friend is simple: they don't know about Thanksgiving.

You see, butchers do love turkeys. They love them, care for them, and protect them - right up until one fateful day when all of a sudden it won't be a good day to be a turkey. On that day no one will trade places with the turkeys for any price, and it will be too late to do anything about it - they will lose everything.

1000 and 1 day in the life of a turkey - surprise, Thanksgiving!

In our world, bad investments can work the same way. The mechanism doesn't really matter, be it ponzi scheme, money-laundering, confidence scam, embezzlement, organized crime, government corruption case, exotic derivatives trading, real estate tranches, A-rated securities (rated by once-admired pay-for-rating agencies), cryptocurrency-related scams (fake ICOs, mass stolen coins, evaporating alt coins, roach motel exchanges, questionable legal/tax treatment, market manipulation for cyclical pump and dump, etc.), or whatever the next sweetheart deal turns out to be. The result is that the world can look very bright right up until the day it doesn't anymore, and it only ever seems obvious in retrospect.

And the thing is, much like the turkey, we don't know when our version of Thanksgiving is scheduled.

Are you willing to make a special arrangement with the butcher, not knowing exactly on what day it will be a bad day to take that bet? Sure, of course you have something to gain, and those gains might be very precious if you could get them - but what would you do if you lost? How many weeks, months, or years of effort and sacrifice went into creating the savings you are willing to trust with the butcher? And do you know you'll only stand to lose what you invested and not more? Butchers tend to take more than turkeys thought they were "investing".

Remember the noble turkey, and consider the great care and effort put into taking care of animals being fattened up before the slaughter. This is the turkey problem, and the best way to win the game with butchers is not to be on the turkey side of the arrangement. Gobble gobble.

* this story is adapted from Nassim Taleb's telling of the turkey problem in The Black Swan, Antifragile, etc.

  • 4
    I was with you until you inserted the word cryptocurrency into the same list as ponzi schemes and scams. – JBentley Sep 4 at 22:14
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    @jbentley I bought Bitcoin (along with Litecoin and Etherium at the same time) when it was at over 16000. I keep them, as a reminder that speculation on large short term gains works right up until it doesn't. I knew people who got more carried away than I - I only lost a few hundred bucks for the lesson on how I can be a turkey too :) – BrianH Sep 4 at 22:22
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    Yeah ok, but your bad luck at speculation doesn't say anything about cryptocurrencies as a commodity. You could just have easily lost that same money speculating on the stock market or on forex. There is nothing inherently "scam-like" about cryptocurrencies as with most of the other items in your list. – JBentley Sep 4 at 22:25
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    The problem with this explanation is that (unless you invest all your and your family's money) you can accept some risk of a Thanksgiving if the other possible outcome is a 150 % return. "You might lose all that you invested" should not scare a rational investor away. If I was somehow magically guaranteed a 75 % chance of getting 150 % return and a 25 % chance of going bust, I'd definitely bet a part of my savings in that each month, as that would be a 112.5 % expected return. There must be something else going on here. – JiK Sep 5 at 11:47
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    The turkey parable is the ultimate example of "past performance is no guarantee of future gains". – Barmar Sep 5 at 18:07
58

I think it's less about proving that it's a Ponzi scheme and more about thinking which argument will resonate best with her.

Everyone responds to different types of arguments.

For someone who is a logical thinker, you could break down the logic and explain how ridiculous the returns are. With such ridiculous returns, you would have to wonder why someone would offer a deal like that. Why 50%? Why not 25%? Why wouldn't they take out a loan and pay a lower rate instead?

For someone who is naive but open-minded, you could explain how ponzi schemes work, the risks involved, and why they are too good to be true (similar to talking someone out of a new MLM business venture).

For someone who is inherently cynical, the "if it seems too good to be true..." argument is usually good enough.

For someone who is motivated by fear and/or greed, you could explain the risks. What if you lose your entire life savings? What is your recourse if something goes wrong? Is this transaction even legal?

One last consideration - it doesn't have to be all or nothing. If she can't be talked out of it entirely, have her test the waters. Start with a smaller "investment" to gauge the scenario. Fortunately, you are dealing with a 1-month timeframe so you can be more attentive.

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    The logical thinker and fear parts can be used quite well in conjunction with the "test the waters" idea. If she decided to risk $100,000, she'd be a millionaire in 6 months if it were legit. Or she could put in $60 and be a millionaire in 2 years. Saving 18 months isn't worth that risk. – Ray Sep 4 at 21:30
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    Be careful with the 'testing the water' strategy. The returns can be great for a long time before they're suddenly gone. Don't accidentally convince her that it works. – Glenn Willen Sep 4 at 22:02
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    @Lawrence But there is 0% chance this is NOT a scam. Obviously, it is a scam, period. There is no 'if' about it. – Grade 'Eh' Bacon Sep 5 at 12:49
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    @Lawrence There's a difference between a legitimate casino that offers some entertainment value in exchange for a known chance that you lose your money. This here is just a pure scam. And the problem is that the scammer will try to convince a player that everything is legitimate, in order for them to increase the amount 'invested'. Interacting with the scammers gives them the opportunity to scam you further. The winning move is not to play. – Grade 'Eh' Bacon Sep 5 at 13:19
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    @Lawrence What you could lose is your freedom if that money is being used for laundering (take good money from patsies, trade that to the criminals at a steep discount for their dirty money, give some of the dirty money back to patsies to keep them hooked and launder the rest through the casino). – IllusiveBrian Sep 5 at 13:39
44

TL;DR

Knowledge is the only way to dissuade a person. If they don't accept knowledge then there is unfortunately very little you can do besides beg them not to do it.


Unless this is money laundering then there is really no reason that such an establishment would need your money just to give you back 150% at the end of the month.

I'm sorry to hear that her family has been blinded and trapped by greed.

I say trapped because this is how I envision the process works:

  1. Give money to casino ($100)
  2. 30 days later get 150% returned ($150)
  3. Casino says that in order to re-invest that you need to give them $500
  4. 30 days later receive $750
  5. Casino says that in order to re-invest that you need to give them $1,500
  6. 30 days later receive $2,250
  7. Casino says that in order to re-invest that you need to give them $3,000
  8. This time the casino says that in order to receive 150% that you must keep your money in longer (60 days)
  9. 60 days later they say that the return is only 125% ($3,750) because of {insert fabrication here} so they convince you to put in $3,000 in new money so that you can make money faster at this lower rate
  10. 30 days later your investment has "grown" to $10,125 so you tell them you wish to withdraw it all but they convince you to just leave it in because the returns are 60% for anyone that leaves it in and gives new money.
  11. 30 days later they show you a fabricated piece of paper with your investment "growth"
  12. 30 days later you really wish to withdraw your money once and for all but they tell you that there is now a mysterious penalty where you forfeit all of the investment "growth" and they take 10% from your real money
  13. You are frustrated but you are not going to start an altercation because the guards are quite beefy. You can try going to the police but they are probably getting their pockets lined with your money. Do you really wish to admit that you willingly participated in a money laundering scheme?
  14. They offer you a way out; get other people to invest and maybe someday they will give you back what you put in.
  15. Rinse and repeat.

Note: $100 was merely used as a simple reference point for easy math.

If your girlfriend has to save up for months just to engage in this behavior then their grasp is going to be like a vice grip from the very beginning especially since she is gambling with money which she cannot afford to lose.

Sunk cost fallacy is going to be a major factor in how much your girlfriend ends up losing.


Given that the buy-in is probably much higher than $100 they may actually start the conversation like this:

So how much money do you wish to make? Can you put up $50,000 immediately?

To which she will reply:

Gosh, no. I only have $3,000 saved in total.

Them:

So no 401K you can liquidate or IRAs? Our returns are far superior to anything your measly investments can return.

She:

I can get about $8,000 if I liquidate my investments.

Them:

Okay, go ahead and do that but in order for us to see that your serious please try to come in with $10,000 because that is the absolute minimum that my boss would allow me to accept without tearing my head off but I'm going to risk it just for you. I suggest borrowing from a family member because you can pay them back with the interest almost immediately.

She:

Good golly, if my family hears about this then they would probably want to invest as well.

Them:

Oh, really??

and queue the scheme...

  • 1
    Put a slightly different way: none of this is on paper. If/when something suddenly changes, you have zero recourse. You can't even prove that you invested any money in the first place. – bta Sep 6 at 21:11
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    This should be the accepted answer because it's the only one that explains how the scam is actually going to go. Having a model that predicts the steps that are going to be used to dupe the victim before they happen is the only way to have a chance of making them see it. – R.. Sep 6 at 22:35
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    This has turned out to be right on the money, in terms of predicting how the scam works. I've got more details from my girlfriend's family, and over time the amount they return per investment has gone down (it's down to 110% now) and the required time to keep the investment in has gone up (it's now several months). – Omegastick Sep 7 at 4:35
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    Then this should be the accepted answer, no? – R.. Sep 7 at 19:07
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    @Omegastick I find it intriguing that your girlfriend's family kept bragging about 50% return on investement while in fact it was not the case at all. – agemO Sep 11 at 8:50
27

A sign that it is a Ponzi scheme is that the returns are so good that the victim lets it ride. They are encouraged to not pull money from the program. Showing them the cash makes it seem real, but they never need to have as much cash as you would think as long as the number of participants is growing.

To convince somebody you need to be able to explain why guaranteed returns of 50% a year would not be sustainable, and 50% guaranteed a month is even more unlikely.

You would have to explain the concept behind the most famous Ponzi schemes, including the way the psychology worked. You will also have to explain that many people have been caught, even people that should have known better.

You also have to realize that convincing somebody to exit once they are in is very difficult. People want to believe.

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    I would add the math in explicitly: If you gain 50% each month, then in 1 year you can turn $1,000 into $86,000 [show them how this math of compounding works], and in 3 years you would have 1.5 BILLION dollars. If someone has a way to earn that type of money, then why do they need yours??? – Grade 'Eh' Bacon Sep 4 at 14:53
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    @Grade'Eh'Bacon Google calculator says 1000*1.5^12=129,746. Are you doing 1.5^11? – Acccumulation Sep 4 at 22:01
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    Guessing that @Grade'Eh'Bacon has a spreadsheet with month entries 1 to 12, and 1 to 36. Taking "in" to mean within one or three calendar years it makes sense. – Daniel R. Collins Sep 5 at 2:20
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    @Joshua Well, the simple fix for that is not to invest everything back. Take out as much as you would get from a reasonable investment. Of course, this doesn't help you if you're given counterfeit money or some such. Or if two gorillas come to you and break your legs. Which is likely the case, because even in a money laundering scheme or similar illegal activity, 50% per month would be way too much to be worth it. – Luaan Sep 5 at 7:18
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    @Joshua There is 0 chance this is a real return [call it a ponzi or whatever, but don't pretend it might be real]. – Grade 'Eh' Bacon Sep 5 at 12:48
19

Have her invest exactly 1 dollar and allow her to only re-invest any money deriven from that very first dollar.

Within 3 years (which equal 36 months), she will either be a millionaire or she will have lost only that one dollar and learned a valuable lesson.

1 * 1.5 ^ 36 = 2,184,164
  • 8
    They probably won't be interested in taking $1. Remember, it's supposed to be a cash game for billionaires. – Therac Sep 5 at 8:44
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    Don't engage with scammers - this is not legitimate, and you will not outsmart them. – Grade 'Eh' Bacon Sep 5 at 12:50
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    @Grade'Eh'Bacon Exactly! If she goes there with a dollar, they'll convince her to invest more - maybe even her life savings. These guys are pros - they run confidence scams all the time and know all the tricks in the book. – ventsyv Sep 5 at 17:46
14

They give the casino the cash, and one month later get 150% back.

That's 13000% interest per year (before you ask: I refuse to use thousands separators for interest rates, to preserve my sanity).

Some of them have been doing this for years.

That seems unlikely. If they started with $10,000 and did it for 2 years they'd have $169,000,000 by now and would have cashed out. If they started with only $100 but did so 3 years ago they'd have even more money.


In conclusion, the information you have about the scam is wrong, so either her family told her lies, or you're not understanding the system correctly. Either way means you probably won't be able to convince her by telling her how investment scams work in detail - she'll be easily convinced by her family that this one is different.

Instead teach her about investing, loans, and legitimate looking scams like Bernie Maddoff. If she's looking to invest her life savings, she needs to know that stuff anyways. There is pretty much only one thing you need to teach her:

The existence of loans and arbitrage means interest rates reflect risk. 10% annual interest is more risk than 5% annual interest. This works the same for offering and taking loans. If there's a mismatch between interest and risk, arbitrageurs get involved and make money closing that gap. These arbitrageurs compete with each other so the gap won't ever be massive.

On top of that, teach her the common interest rates for stuff people actually invest in, and their associated risks. Start with government bonds, corporate bonds, and indices. Then tell her 100% annual interest is betting on a color in roulette. Once she knows that it's up to her to figure out what kind of risk 13000% interest would represent if it wasn't a scam.

  • 2
    "either her family told her lies, or you're not understanding the system correctly" Or the casino lied to her parents. or her parents misunderstood. – RonJohn Sep 5 at 14:41
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    @RonJohn I intentionally wrote "told her lies" instead of "lied to her". I agree I could have been clearer, but decided doing so wouldn't noticeably improve the answer. – Peter - Unban Robert Harvey Sep 5 at 14:46
  • To "tell lies" is pretty active. Changing it to "repeated lies" would definitely clarify the answer. – RonJohn Sep 5 at 15:43
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    @RonJohn They are telling lies if they claim they've been doing it for years and they get to hold (or ever see, for that matter) all of the cash at the end of each month. Assuming we're talking about either USD or Philippine Pesos, (or any other similar currency) the physical properties of the bills would make that rapidly become absurd, and then impossible just a few years into the scheme, regardless of how little was initially invested, and even sooner for investments of reasonable size. The only way this would not be true is if they are confused about the RoR and it's actually much smaller. – Xander Sep 6 at 15:17
  • @Xander see my first comment to this answer. – RonJohn Sep 6 at 16:39
9

How to convince her it's a scam? Easy, ask the following questions:

  1. Is it the casino, or someone AT the casino? Do they have any paperwork showing they loaned the money to the casino?
  2. Why would the casino pay 50% monthly interest rate when even credit cards top off at 25% annually?
  3. Surely the casino can go to a bank and get a much better loan, why does it need to get it from you?
  4. If the casino needs money as a "float" why don't they just keep more of their profits in the vault instead of paying you outrageous interest?

These question will reveal the truth - it's not the casino borrowing the money, and they don't need it to "float" billionaire, therefore it's a scam.

I suggest you call the police or the attorney general of your states (if you are in the US) immediately.

  • 3
    Your last sentence is important. It's the first thing I would do to prove my point to my girlfriend: Report the ponzi scheme to the police and let them do their work. – Alexander Sep 6 at 6:39
  • @Alexander While morally the right thing to do, it might allow the girlfriend's family to falsely attribute the loss of their money to OP's actions. It will also need the girlfriend's and her family's cooperation, because on his own the OP has no proof. – Peter - Unban Robert Harvey Sep 13 at 9:23
6

Although other people here already shown 150% compound return is impossible, I doubt you can convince your girlfriend and the family easily.

As mentioned by Daniel Kahneman in his book Thinking, fast and slow, human being love to convince themselves to unrealistic stuff with stories(thinking fast). To make one think rationally (thinking slow) is not easy unless you tell them an even better story.

Because many people hate to be proven wrong by others, letting them discover it themselves is a better way. Reconstruct a monopoly game and play with her and her family, put a new rule that looks absurd in monopoly game :

  • From the beginning, the banker offer players to deposit $200 for the first 5 round, with a penalty of forbidding from purchasing any property. The first 5 round $200 will continue to compound 150% interest and pays in round 12. (You must prepare the payout table in a paper for 36 rounds before you start the game)

Since the total of monopoly virtual money is around $20,580, the monopoly banker's will exhaust all the money in round 10 (compound gains value of the $200 is $20028.52).

You can also tweak the "put deposits but no property buying" rules to make the compound value increase even faster, e.g. put $1,200 for compound interest with the no buying penalty, cannot collect $200 for first 5 round. Here, the banker will go bankrupt in 7th round.

p/s: by the way, the idea is royalty free. Feels free to create one new board game out of it and make sure you don't stumble over Hasbro monopoly board games license.

  • Slight change to this answer: The official Monopoly rules say the bank never runs out of money, that is, hyperinflation is by the book. Even if a house rule results in the bank paying out ten times as much currency as it started with, the bank still gets to make the payment and remain solvent. – Codes with Hammer Sep 6 at 18:17
1

Alternatively to the good answers already here, but depending on your local laws and regulatory agencies, you may also be able to tip off the regulatory agencies that you have strong suspicions that this is a Ponzi scheme. It probably won't happen fast, but your girlfriend can't invest in a likely-illegal scam if the people running it get arrested first.

0

This investment return makes it more or less certain that this is a scam. A 50% return in a month, every month, on just cash, is absurd. If they were generating those returns, why wouldn't they keep more of that 50% for themselves? The only answer is because need to promise a lot of free money in order to attract victims.

First, have her ask her family for the documents and materials explaining the transaction - receipts, contracts, prospectus, pamphlets, whatever. I am guessing that documentation is minimal, maybe no more than a claim ticket. Criminals usually do not like lots of documentation of their crimes. Legitimate ventures usually do not mind explaining the details to their investors.

Then, have her ask her family how much money from this casino venture they have withdrawn and taken home, versus how much they have reinvested. Odds are they reinvest every bit of it. All the criminals need to do is flash some cash and trust that most or all of it will be "reinvested." They just need enough circulating currency to make it look real. At the end, when they have drawn in as many suckers as they can stand, they leave town.

Finally, have her warn her family it is a scam and tell them it's their fault if they lose everything. They are probably too far gone, but maybe this will slow them down. if nothing else, it will set the tone for when they come begging for money.

If you're feeling public-spirited, you might try turning over some information to local law enforcement. But I think it's wisest to avoid the criminals entirely.

-5

I'm going to start with the assumption that it's at least semi-legitimate. I can't really know since I'm not there. Yes, it's unsustainable long term but you don't need to stick around for the long term.

Invest a small amount of money. (say $100). After two months you will have $225. Take out $125 and reinvest the rest. You now have zero risk and a 25% return on your original investment. What's left is house money.

If its a scam you'll find out quickly before losing a lot of money. If it's a Ponzi scheme they'll let you take out the $125 in order to keep the scam going.

If its not a scam you'll have enough money to live comfortably on forever in about 3 years.

I would also pull out money at regular intervals say 10,000, 50,000, 100,000, 500,000 etc.

The biggest problems are lack of understanding of compounding interest and risk. A high interest rate will turn into ridiculous money very quickly. There's no need to increase your risk by investing more. You should be doing the opposite and minimizing your risk.

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    Obviously it is not even semi-legitimate. Why give an obvious scammer $125? You are advising someone to get scammed out of their money. – Grade 'Eh' Bacon Sep 5 at 12:50
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    This is terrible advice. Ponzi schemes need new investors to feed the old. They'll play shell games to keep you coming back until the house of cards implodes. The only winning move in Ponzis is to avoid them entirely, as they have no means to generate legitimate revenue – Machavity Sep 5 at 13:17
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    @Savage47 Please re-read the question at hand. The girlfriend is considering to buy into this using her life savings. I don't believe that $100 qualifies as life savings in most countries. She is gambling with money she cannot afford to lose. Change $100 in your question into a more likely $20,000 and you will quickly see why your suggestion is ludicrous. The buy-in is not $100 because the effort required to work you over is not worth such a small amount of money. – MonkeyZeus Sep 5 at 13:29
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    I read it several times and fail to see the silver lining. The suggestion of "Yes, you should proceed with getting screwed because you've managed to defeat the opponent with a 5 minute mental plan against a professional scheme which may involved thousands of people." is generally frowned upon. – MonkeyZeus Sep 5 at 13:37
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    I appreciate that you are trying to limit risk here, but this is a dangerous game and it is wisest not to play. For example, the scammers might continually up the buy-in requirements to participate. Or they might eject somebody who keeps making withdrawals. There are lots of ways the scammers could convince a half-skeptical person to just keep adding little bits of money to chase higher returns. Hearing about all the money you're missing out on is really difficult and even once-sensible investors can be hypnotized. – NL7 Sep 6 at 18:14

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