Kool-Aid has an awful aftertaste

Mention the name “Craig Warriner” at your next gathering of friends, and you’ll be able to identify the BHI burn victims by the looks on their faces.

While former-insurance-salesman-turned-investment-messiah Warriner whiles away the hours in his specially-requested private jail cell, hoodwinked investors are coming to terms with the fact that they may never see their money again. 

Sequestrator Cawood Attorneys is currently picking over the R4.78 million that remains in the BHI account (a shadow of the estimated R3 billion that Warriner lifted from investor pockets). Meanwhile, BHI trustees are considering an application to the high court to have the trust declared a ponzi scheme. 

None of this is news to anyone who’s read a financial publication in the last week or so. As South Africans, we aren’t strangers to the concept of ponzi schemes either, what with the ghosts of Mirror Trading International, Krion and Africrypt still looming large in the corners of many a courtroom (editor’s note: not all ghosts are good for you). Which leads us to the same question we always seem to ask when a new ponzi scheme makes the news cycle: how does something like this happen?

What Kool-Aid and cults have in common

If you’ve found yourself in conversations on the subject of BHI recently, you may have encountered or even used the term “drinking the Kool-Aid”. While the product itself may not have made its way onto South African shores (the closest comparison we have locally would probably be something like Drink-o-Pop sachets), our exposure to American-made films and series means that this particular phrase has wormed its way into our lexicon nonetheless. 

The meaning is clear though: when someone is “drinking the Kool-Aid”, they are committing to a possibly doomed or dangerous idea because of perceived potential high rewards. In case you’re wondering how such a bleak concept became associated with a sugary children’s drink, I’m happy to inform you – but be warned that the backstory is particularly macabre.

On November 18, 1978, roughly 918 people members of the People’s Temple cult – back then referred to as the People’s Temple Full Gospel Church – committed suicide by drinking cyanide-laced cooldrink at their compound in Guyana. Newspapers picking up the story reported that the compound was strewn with the empty Kool-Aid packets that had been used to create the deadly cocktail. Factually, this was incorrect – cult members had actually used a cheaper knock-off product called Flavor Aid – but that didn’t stop the image of those empty Kool-Aid packets from burning itself into the public subconscious. 

Cult members performed what they believed to be “revolutionary suicide” at the instruction of their leader, Jim Jones, who founded Jonestown as a refuge from the perceived threat of fascism in America. The incident became widely known as the Jonestown Massacre. 

Personality equals power

To understand how modern-day investors are able to fall into the trap of ponzi schemers, it actually helps to think about Jim Jones. Ask yourself: how did one man convince almost 1000 Americans to not only give him all of their income and assets, but to sell their houses, break ties with their families, quit their jobs and move to a jungle compound in South America? 

The answer is the same as it is with many cult leaders: he had a powerfully magnetic personality that drew people to him. Charming on the surface, yet dominant enough to silence those who would try to speak up against him. And he wielded that personality like a superpower, drawing in people from all walks of life until the size of his following alone was enough to start magnetising new recruits. 

Does that sound familiar? 

Victims of Craig Warriner’s scheme often refer to the fact that he made extensive use of his St Stithians College old boys’ network, and appears to have made multiple donations to the school. By paying above-average commission fees (as high as 5%) to brokers, Warriner created the illusion of a man who was not only very wealthy but magnanimous in his wealth. All he wanted to do was help other people get wealthy. And that carefully constructed facade is all it took to reel in the money. 

The case studies stretch beyond Warriner. Many who have met or worked with Steinhoff leader Marcus Jooste have commented on his strong and somewhat overwhelming personality which invited no questioning and practically demanded obedience. Bernie Madoff was renowned for bullying his detractors, while carefully crafting an image of rationality and competence to those whose opinion was important to him and his business. Charles Ponzi, the Italian immigrant who would take America for a ride and later lend his name to this phenomenon, is often described as “clever, charming and incredibly charismatic” by those who fell for his schemes. 

Ponzi-spotting for beginners

As much as we hate to admit it, we humans are herd animals. When enough of us start to move in one direction, the rest will start to lift their heads and wonder where we went. If you need clear evidence of this, consider that it is a well-established and studied fact that individual investors will follow the advice of their coworkers, even when the advice given contains no value-pertinent information. We value the advice and recommendations of those around us far more than we trust our own research and – in many cases – our own common sense. 

So, what can we take from this article and apply when the Next Big Opportunity comes along? 

1. Beware the charming leader who requires blind obedience. Real genius doesn’t hide its methods. If you’re being persuaded to “just trust” someone, that’s reason enough to do the opposite. 
2. Consider your sources, and then consider them again. Be aware of your own tendency to believe the people around you simply because they are friends or family members. Look past the person making the recommendation and examine the facts in the cold light of day. 
3. Don’t believe the hype. There’s no such thing as an investment that only delivers returns. If you can’t find a trace of a market dip ever, or if the promised returns seem too high to be true, then there’s reason to be cautious. 

Remember: if investing was easy, we’d all be living in mansions. As much as you want to believe that there is a shortcut or an undiscovered path to the returns of your dreams, the chances of that being true are not worth risking your hard-earned cash on. 

And if you’re currently feeling the BHI burn – my sympathies, friend. Hindsight is frustratingly perfect, isn’t it?

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.