Unequal-equation

by Thomas Sim, 19 Feb, 2001

If you study corporate finance and familiar with the capital asset pricing model, you should know the following equation:

Rp = Rf + B(Rm-Rf)

Rp = Return on investment portfolio P

Rf = Return of risk-free investment

B = beta factor

Rm = Return of average market portfolio

However, this article is not about investment, nor is it about mathematics. Here, I would like to discuss a condition of changing the equilibrium of the market system, a get rich fast and easy scheme.

The above capital market line simply says that higher risk warrants higher return. A stock with beta of 3.0 has double return of another stock with a beta of 1.5, though with a higher risk. But this is not the law within which many people got rich nowadays. Following this equation is already a known playing field. People try extraordinary ways to beat the rules of the game. Followings are examples:

Parallel imports, pirated/faked products, market monopoly and corruption. Lastly I would say includes pyramid scheme.

In pharmaceuticals, we encounter parallel goods as a norm now. By definition, parallel goods are exact similar brands illegally imported into a market place where there is huge profit to make. I once read from Newsweek that parallel anti-HIV drugs in South Africa is cheaper than similar brand medicine found in South Africa itself. Apparently, it is Italian Health Ministry reimbursed stocks and the middleman made a huge margin by reselling them in South Africa.

An Indian expatriate who sat next to me while flying down to Johor Bharu in 1997 asked me why he could get a similar but cheaper glucose meter in Singapore than in Malaysia. He said he wondered if Malaysians knew that they have been taken for a ride. I pondered over his comment for a while and replied that price was a perception of the mind. When there is a willing customer and a willing seller, a deal is closed. In fact, the same situation could happen within the same country, town or even within the same shopping complex. But you know that is not an excuse! It is more complex than that!

Let's look at marketing and PEST factors. The company that sells the meter has to invest in the business and thus, takes a calculated risk. Obviously a higher risk needs a higher return. On the other hand, if there being higher return with a similar amount of risk, any businessman would choose to make his shareholders happier. In which case, may be Malaysian market is such for that glucose meter. Or, there may be more competition in Singapore that pressed the price low. How about product life cycle, marketing expenditure, economic stages of the nation and government regulations?

It is too simple to 'globalize' the glucose meter. The standard of economic and social progress is vastly different. Just like Chinese toys, they occupy 6 among 10 toys sold in the US but how many Chinese kids have one? You can compare STPM results head on, but how do you grade a poor kampong boy from a rich city boy who has tuition and effective textbooks?

Take parallel import for example, it only exists when there is money to make. It beats the equation and upset the equilibrium. With corruption, you gain a much higher return with lesser risk as your competition is eliminated. In business monopoly, you mark up your profit margin any how you like with the support of some VIPs. So is pirated/faked goods, you rip huge margin of return, for the penalty is light as risk is manageable. The list goes on ...

How about pyramid scheme? The beauty of these schemes is that the risk is almost none and return is perpetual if compared to conventional plans. Even more, the concept sells by itself because people are basically greedy. The once caught and pending court case of GoldQuest scheme is an example.

All these types of schemes rely on business referrals. As you introduce referrals, you make back the premium you have invested and as your referrals make referrals, you continue to make money! The only risk is that some referrals may find out the dirty tricks and come back to kill you. Never mind, you can be quite sure that due to tremendous greed, they are like you, continue to pass on the greedy messages to new referrals as they get money on the way. And even if they do find out, you can just say that you are also a victim, like them.

There is a chinese saying: no rich man is a straight man. This world is painted with many equations. May be in the first place, life is an unequal equation after all.