Essay

I recently read about the ‘Emu business’ that had apparently led to ‘investors’ losing major capital in the four Indian Southern states over the past few years. (More here)

The story was this: the Emu is the next big thing after Chicken in the Poultry business. And it was much more profitable. There was major world-wide demand for Emu meat, Emu eggs, Emu leather, Emu feathers and everything that was Emu. It was simple to make money from Emu farming – you simply paid the deposit to get the Emu eggs, and they even partly funded the Emu rearing till the birds are ready to sell, and even bought the Emus from you.

Apparently, the primary perpetrator even started restaurants that served ‘Emu delicacies’ and promised to buy Emu eggs and meat from the farmers. Now, this was quite outrageously ambitious from even a Ponzi scheme viewpoint.

I had ‘invested’ many years back in a similar teak plantation scheme in which they promised to pay me back with mango and teak trees, and even buying back the wood from me in case I was not interested in the ‘post dated cheques’. Eventually, I was left with some debentures which were not even worth the paper they were printed on.

Likewise, the ‘Emu investors’ are now left with some 15000 Emus in total with no idea what to do with them. And predictably, it is not clear under which regulator’s ambit this falls, and hence, who is supposed to take the blame for allowing the Emu scam to reach such epic proportions. Seemed funny when I read it, but not funny for the people who lost their money in the ‘Emu business.’

Lots of such ‘Emu businesses from the start’ or ‘businesses that become Emu businesses’ exist in the capital markets, despite well-defined regulation.

I started buying Deccan Chronicle Holdings in 2010 when it was priced below its then book value. Since then it has given me approximately -92% returns. Which is to say that basically I have lost that money. It used to be part of the mid cap 50 and I think even the Junior Nifty at some point – so not a small stock by any means. And at least the publishing business was a reasonably successful one in the south. Deccan Chargers was supposed to ‘unlock value’ in my analysis. Of course, in hindsight, it was a ‘Emu business’. Now it is clear that the promoter was a ‘Emu businessman’ too. And add to that inaction by regulators.

Minority shareholders of Kingfisher Airlines find themselves in a similar situation. But unlike Deccan Chronicle which had a profitable publishing business, Kingfisher has always been a ‘Emu business’ from the start – a pure flight of fancy.

There is a difference between a business and an indulgence. Deccan was a business before the promoters changed their minds about how to treat minority shareholders. Kingfisher was an indulgence from the start.

One common factor beyond the nature of business has been debt. Debt is a tricky thing.  Till a point, the borrower bears the risk, and beyond that point, it gets shifted to the lender. Then, the lender starts begging and the borrower shoos him away and decides the terms of the relationship. ‘Take this or you won’t get even this’ he says. In such cases, which turn out to be ‘Emu businesses’ it becomes increasingly unclear who is at whose mercy.

Who can help a minority shareholder in such a case? It has to be the regulator. Of course, help need not mean ‘repay me the money I lost’. That’s an investing mistake that the investor must pay for – specially if he invests in ‘Emu businesses’. But help can mean the assurance that ‘I will ensure that if someone takes you for a ride, he goes to jail or at least faces charges.’ Absence of that means an absence of a system that works.

A friend gave me an interesting insight yesterday. He said that while evaluating companies, he classifies them into 3 types. The first group is ‘White’ – those who do not require laws and regulation to do the right thing. The second group is ‘Black’ – those who misuse laws whatever you do. And the third group is ‘Shades of Grey’ – those who are fine if systems work or when things are fine, but when things go wrong, are quick to step over the line.

The Whites and Blacks are easy to identify, but it is the Grey where the majority lies, and are tough to identify. It is the Grey where the regulator must be most active. Even the most astute individuals and institutions may find it tough to recognize the Grey.

Investing in ‘Emu businesses’ will continue to happen as long as there is greed and fear. But allowing ‘Emu businessmen’ to get away is criminal. Till that happens, these Flightless Birds will continue to take investors on Flights of Fancy.

People who have traveled by local train in Mumbai would be familiar with an advertisement by ‘Baba Bengali’ stuck in the compartments. It used to have claims like ‘solve all your problems in 11 days’ or ‘money problem? no luck in job? marital problems? get guaranteed solution in 3 hours’ or similar exaggerated claims.

I always used to wonder who ever believed those outrageous claims made in those ads. Apparently, ‘Baba Bengali’ became a successful scam business and almost a pseudonym for ‘tantric’ thugs. So much so that there were many newer entrants into this ‘business’.

The surprising factor was that they adopted some modified version of Baba Bengali as their name (presumably you cannot copyright scam names!). So now you had a ‘Baba Raza Bengali’, a ‘Baba Guru Bengali’, a ‘Baba Khalid Bengali’ and perhaps a few more.

Why did they do that? And how did people – most of whom knew by then that Baba Bengali stood for scammers – still fall prey to those almost hilarious ads? I got the answer to that question when I went through a recent research paper by Microsoft titled ‘Why do Nigerian Scammers Say They Are from Nigeria?’ You can check out the detailed paper here.

There is a lot of mathematical modeling done there, but the crux of the matter is the cost of false positives vis-a-vis the benefits from true positives – specially in target markets where the victim density is low. In simpler terms, how does a scammer increase ultimate conversion rates and its benefits without increasing costs of handling respondents that don’t convert?

Like any marketing activity, there is a cost associated even with scam. But as scamsters like ‘Baba Bengali’ or ‘Nigerian person asking to deposit money’ or ‘You just won a UK Lottery’ started adopting online methods of marketing, the costs of delivering their message kept reducing – so they could reach a large potential audience at zero or very low cost.

But while their cost of message delivery reduced drastically, their potential problems also increased. Because a lot of people started responding to their ads.

Now, for a traditional marketer whose costs begin much earlier, and whose campaign ends with response rate, that would not be a problem. But for a scamster, the costs begin only when someone responds. Too many responses that don’t convert is a problem, because there is a cost associated with handling people who respond but eventually back out because of some reason. They are unprofitable for the perpetrators.

Additionally, more the number of people who respond and back out, more are the chances of the scam getting leaked and the risk for the scamster getting caught.

That is the reason the Nigerian emails or the UK Lottery SMS or the Baba Bengali content is what it is. It is outrageous, hilarious and unbelievable for most of us. Most of us are likely to ignore it. Nobody but the most gullible will respond to them.

And as Microsoft found in its research, ‘Since gullibility is unobservable, the best strategy is to get those who possess this quality to self-identify.’ That is the target market for them.

It is not meant to attract but repel most of us. This strategy is deliberately designed to target accurately only those most likely to convert, and hence, prevent false positives.

Now this insight and the realization that false positives are a problem for scamsters actually helped me get rid of some ‘personal loan’ spam recently.

I used to repeatedly get those calls stating that I will get loans and credit cards without documents, with amazing credit limits and outstanding free gifts. Some of those calls almost started feeling like the Baba Bengali or Nigerian scam. I decided to ‘become a false positive.’

Earlier I used to get irritated on receiving these calls, but they never stopped. Almost as if the caller expected my irritation. But a few weeks back, I actually told them that I had heard a lot about their wonderful product and I was highly interested. The caller sounded positively surprised by that. I gave her false details on where to come and meet me.

I gave them directions on how to reach an address that I did not stay at. When they got close to that address, I called them to say I am sorry I am not at home due to something urgent, but am interested so would love if they can reschedule the appointment. After 2-3 such iterations, I met them, told them to meet me again for next steps as I would like to know more about the product.

Somewhere after this, the caller probably realized that I was a ‘false positive’.

Not only has she stopped calling me, but I think I have got off a couple of other calling lists as well. I am hoping that all personal finance scamsters use similar target (or victim?) lists. My behaviour, I am hopeful, gets me off all those lists. I will thank Microsoft for it all my life.