If you know what to look for and you are cautious, Ponzi schemes are easy to spot, Paul Hansen, Stanlib's head of retail investing said on Friday.

"Once there's a promise of high returns, warning lights should start flashing," he said.

This follows the uncovering on Thursday of one of the country's largest Ponzi schemes, estimated to be worth up to R10-billion.

According to media reports, the scheme was allegedly run by Barry Tannenbaum, a grandson of one of the co-founders of Adcock Ingram.

Hansen said the problem was that many investors in South Africa did not ask a lot of questions.

"If someone is approached with an opportunity that seems quite unbelievable, they should be suspicious and they should start asking questions ? lots of questions," Hansen added. Another sign, he said, was steady and consistent returns.

"The (United States) Ponzi scheme operator Bernard Madoff gave his clients steady returns ? they should have been suspicious because investing is volatile by nature," Hansen noted.

Ponzi schemes are extremely dazzling

Often in Ponzi schemes, extremely dazzling, sophisticated language or financial jargon is used, with the scheme's promoter taking advantage of the layman's lack of financial knowledge.

According to Hansen, veteran investor Warren Buffett often emphasises that he will not invest in anything he does not understand.

"If an investment scheme is not simple and straightforward, do as Buffett says and walk away," Hansen said.

He advised investors to avoid investment schemes involving one or two individuals.

"Rather invest with a brand ? a non-brand is an unknown entity.

"Even if you're going into a legitimate private equity investment ? you've got to do your homework because there's no umbrella around you to offer protection," Hansen said.

He stressed that an investor should always be in the possession of a lot of details about their investments."

Methods of operation a secret

"You wouldn't have got any details out of Madoff," Hansen said, explaining that the Wall Street veteran ? who took his investors for about US$50-billion ? had always insisted that his methods of operation were a secret.

According to Hansen, the best way for investors to protect themselves was diversification.

"No one should have put more than 10 percent of their investments into a scheme such as the Tannenbaum one.

"If they put any more than 10 percent in, then they were being reckless."

Hansen said that with diversification if an investor became part of a Ponzi scheme, he could escape without losing his entire savings.

"We use diversification... our approach is four assets classes: cash, bonds, listed property and equity.

"We ask investors to consider risk profiles and once that's determined, they invest."

Hansen said with reference to the Tannenbaum scheme: "If it was so good, why did he bring in other people?

"If you hit upon a successful venture, surely you'll want to limit the number of people involved?"