Quote from: hazek on July 03, 2012, 01:50:13 PM

Quote from: BurtW on July 03, 2012, 01:46:00 PM

This thread is about BS&T it is not about ponzi schemes.

The only way this sentence makes any sense at all is if you believe BS&T is not a ponzi scheme, which I find no good reason to share. If you have some facts to support your belief I'll gladly take a read but until then, for me, talking about BS&T is talking about a ponzi scheme.

Tell me this, then: what could anyone possibly do to prove that BS&T is not a Ponzi scheme? Describe a few more details of his business? Open up his books? Those can all be falsified.

The truth is, there is nothing he can do to prove that he is not a Ponzi. This "discussion" always devolves into some combination of "the yield is too high", "he isn't transparent enough", or "you guys don't understand finance" but the reality is that none of us can know. You don't know for sure that he is one, and we don't know for sure that he isn't one. This is certainly true of any Ponzi scheme, but it is also true of any other business that has unnaturally high yields with seemingly low risk.

Luckily for us, people deal with uncertain situations like this every day, with a concept called risk. Most of the time, people talk about counterparty/credit risk or currency risk or the like. Everyone knows that high yields, in an efficient market, can only be explained by high risk. Given that pirateat40 has given us no reason to believe he has a high counterparty risk, I propose a new form of risk at play here: copumpkin et al.'s "too fucking good to be true" risk. This risk factor arises naturally from situations in which the traditional risk factors appear too small to support the observed level of reward. I'm sure that most Ponzi investors have considered a similar concept, possibly without the precise naming I used.

Anyway, "too fucking good to be true" risk is just another risk factor. We can observe the rewards, and can hypothesize on the degree of the individual risk factors, and can make a reasonably educated decision for ourselves about whether to "invest" in BS&T. Sure, we'd prefer to have more certainty about the uncertainty of BS&T's prospects, but so would most investors in risky businesses. If I buy junk corporate bonds, I'd love to know that the company doesn't have some skeleton in its closet that will cause it to lose me all my money, and if I buy Greek government bonds, I'd also love to know that Greece isn't going to default on its debt (or "restructure" or whatever).

We don't know that pirateat40 isn't going to default, or even that he's honest. So far he's shown himself to be an honest, friendly guy, but up until the mortgage crisis, nobody thought that real estate was going to crash so hard. Furthermore, I've gone my entire life without getting hit by a car! Tail risk is hard to predict

We can make estimates, and you're right: from the outside, this does look like a Ponzi scheme. Hell, from the inside it might, too.

But consider for a moment the (possibly very small) possibility that he really has found an excellent way to make money. If you knew for sure that he was doing that, would you not invest with him? Do you think he'd tell people how he was doing it? Of course not! Do you think people would be screaming at you that it was too good to be true and that he was a Ponzi? Of course they would. The "the returns are too high and it isn't transparent" argument applies to any hypothetical business that has succeeded where everyone else has failed, in making craploads of money. Furthermore, as I explained earlier, that argument can't be falsified, so even if you are convinced of it, there's not much point in debating it (as I'm doing now?).

My basic point boils down to the following: every one of his lenders/depositors that I know are well aware that it could be a Ponzi. I know that I and several others of us are not putting more than we could handle losing, so this really boils down to a highly risky piece of speculation. If it pays off, it'll pay off very well, and if not, we'll just go do something else and possibly hunt pirateat40 down if the loss appears to be malicious. The risks are hard to assess (aren't all risks?) but we most certainly are factoring them into our decision, and having people on the forum assume that we haven't thought through all the obvious ramifications really doesn't help anyone. Face it: none of what you're saying is deeply insightful; it's just basic common sense. We all have it, and we're either blinded by greed or just making a risky investment.

Granted, you can apply what I'm saying to any other Ponzi scheme, and I'm sure others made similar arguments for Madoff and whatever. It doesn't matter: I'm not going to whine if he disappears. A venture capital fund invests in out-of-college startups knowing well that only a small fraction of the startups it invests in are going to make any money at all. It's not irrational to speculate on high-risk ventures. If you think the risk of him running off with your money is higher than the potential rewards, avoid it; we think the rewards are higher than the risk, so we put money in, and it really is that simple.

tl;dr: personal responsibility, different risk tolerances, respect