The Goal of an Investment Formula.

I thought a lot about this one.  And, the more I thought about it, the more I realized that it’s really impossible to come up with a formula that we can just plug some information into and that will give us the result we are looking for — which , in our case, is a decision of whether or not to invest in a certain HYIP.  Of course, this is the big question that investors wrestle with.  The question of how MUCH to invest is secondary and we won’t get involved with that here as it’s more of a personal thing.  A $100 investment might be a fortune for one person but peanuts for another.  However, all investors — large and small — have to make the decision of whether or not to invest.  Again, that’s the issue that we’ll tackle here.

But, back to our “formula.”  In engineering (my field), for example, there are formulae for all sorts of things.  If you know them and use them correctly, you will get very precise results.  Unfortunately, in the HYIP business, there is no such animal which will always give you the right answer.  Why?  Because there are human beings running the show!  Humans aren’t robots that act according to mathematical or scientific law.  Their actions are motivated by a host of unpredictable factors, the chief of which might be the desire for personal gain.  And, this is often at the expense of others who will lose in the process.

So, probably the best we can do is try to develop a procedure that we feel will MAXIMIZE our chances of selecting an HYIP that will survive long enough for us to realize a profit from an investment — ideally a considerable profit.  This will be our objective here.  But, as a disclaimer, we must never forget that, because this isn’t math or science and because human beings are in the driver’s seat, almost anything can happen.  However, our hope is that by applying a logical approach to the problem of selecting an HYIP, we will decrease the unpredictable human element and increase our chances for a successful decision of whether or not to invest.

In order to get my thoughts organized and to minimize the chances that I will forget something important when I write, I printed out a copy of previous HYIP Insights #8 (which you can find here) entitled “The Wise HYIP Investor.”  You might want to do the same thing and also use it as a reference as you read this.  This present article will build on The Wise Investor article and frequently, as we go along, I will simply refer back to the earlier article — just to keep the length of this one under control.

All about Interest Rates.

The interest rate that an HYIP offers will give you a pretty good idea of its chances for surviving in the long term.  Is someone gives me $100 and I tell him that I will invest it for him and pay him interest every day for the privilege of using his money, it will be easier for me to pay him $1 (1%) per day than $25 (25%) per day.  So, it is pretty obvious that, if a HYIP offers a very high interest rate, it might be difficult (or impossible!) for it to sustain this level of payment in the long term.  Such investment schemes often rely on deposits from new investors to pay the interest due to earlier ones.  This is what is known as a Ponzi scheme, named after Charles Ponzi, a businessman from Boston (USA), who in the 1920s used this system to earn a LOT of money for himself — for a while, until people got wise to what he was up to.  So, an important issue that we will have to address in this article is what interest rates are apt to be sustainable and what rates are not.

But, first we have to clarify something.  When you study the investment plans offered by different HYIPs, some might provide a daily interest rate, some weekly, and some monthly.  There are even some that pay interest earnings on an hourly basis.  Furthermore, some plans return your principal at the end of the investment term and some return it along with your interest earnings.  In addition, there are a few programs that I refer to as “perpetual” programs that never return your principal at all. But, the term of the program goes on and on until the program finally closes its doors.  Well, all this can get very confusing because, in order to compare the interest rates of two or more programs, you have to be compare the same “kind” of interest.  You obviously can’t compare hourly interest rates with monthly interest rates as they are very different animals.  You have do to some converting to get them both into the same form which, for this example, would probably be either hourly or monthly rates.

In this article, we will convert all interest rates to DAILY NET INTEREST.  Net means pure profit.  Let’s do a number of examples to see how this will work…

Example 1.  Investment plan pays 1.5% interest per day for 60 days and returns your principal at the end of the plan.  This example is easy.  Since you are getting your principal back, all the interest you earn is pure profit.  So, the daily net interest for this example is simply 1.5%.

Example 2.  Investment plan pays 3.5% interest per day for 45 days but your principal is returned to you as a part of your interest earnings.  Here your TOTAL GROSS interest earnings would be 157.5% (3.5 x 45).  Since your principal is included in this, you have to subtract 100% (corresponding to your initial investment) to get the TOTAL NET interest you will earn or 57.5%.  This is earned over a period of 45 days.  So, finally, you divide 57.5% by the 45 day investment term to get the equivalent DAILY NET interest of 1.28%.  A few people might have been confused by these two cases.  Example 2 pays a higher interest rate, but, since it includes your principal, Example 1 is actually a significantly better deal.

Example 3.  Investment plan pays 25% per month and returns your principal after 60 days (2 months).  Since your principal is being returned at the end of the investment term (like Example 1), your interest earnings are pure profit.  Assuming there are 30 days in a month, your average daily net interest rate is 0.83%  (25/30).  So, even though this example has the highest numerical value for its advertised interest, its daily net interest rate is the lowest.

Example 4.  Investment plan pays 1.3% forever.  This is an example of a “perpetual” investment plan.  It’s a little bit difficult to compare this to the other examples as the principal doesn’t explicitly come into the picture.  Such a plan might typically offer an interest rate on the low side, the explanation being given that it’s a good deal as you will be earning interest on your deposit forever.  It IS a good deal if the program is a survivor.  If it isn’t, it’s a bad deal.  But, this is the classic HYIP dilemma again and we needn’t get into that.  I think that I would treat this example the same way we handled Example 2.  But, in this case, you would have to ASSUME a life for the program.  This is equivalent to assuming an investment term.  Just to put some numbers on this, let’s assume that the program will survive for 6 months (180 days).  So, the total gross interest you would receive would be 234% (180 x 1.3).  Subtracting 100% to correspond to the return of your principal, the total net interest you would receive for the 180 day period would be 134%.  Dividing this by 180, you would get the average daily net interest earned — 0.74%.  Next, suppose we assume that the program would survive for a year (360 days).  Then the total gross interest that you would receive would be 468% (1.3 x 360).  Again, subtracting 100%, the total net interest would be 368% and the average daily net interest would be 1.02% (368/360).  So, as you would expect, the longer the program survives, the higher the interest that you would earn.

Well, it’s easy to see that this can get a little bit tricky.  However, I hope I have made the point clear that, in order to compare interest rates offered by different programs, you MUST change them all to daily net interest rate (or some other common interest rate).  You have to compare apples to apples or oranges to oranges.  You can’t compare apples to oranges and expect to come to useful conclusions.

OK, this is enough for starters.  In Part 2 of this article, we’ll take a look at interest rates offered by some programs that are running right now.  Just like the above, we’ll compare them after we have converted them to daily net interest rate.  This will be interesting.  I haven’t done this yet for these programs!  In fact, I think daily net interest rate might be a nice number to add to reviews of new programs as they come along.  If the length of Part 2 doesn’t get out of hand, we’ll also take a look at ranges of interest rates that might be suitable for long term and for short term investments.

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