We start this week's column with a warning to children: do not smoke. It's bad for you and will kill you. Also, it's highly addictive and can get you into all kinds of trouble. I'm going to talk about that and combine it with an easy-to-understand explanation of some technical financial terms and economic behaviour.

All that in half a page for only a fraction of the dollar you paid for this newspaper - even I find that hard to believe, and yet it's true.

I've smoked for most of my life and am hopelessly addicted. So have and are my brother and his wife. None of us can give it up, and it's going to kill all of us. So, kids, don't start. Now, children, it's time for you to go and play outside. Uncle Roger has to have an adult chat with your parents.

Recently, as I have mentioned before, the people who used to import the tobacco I like into Bermuda were bought by another company, which stopped importing my brand. The new company isn't against tobacco products; they sell two utterly horrible brands of the stuff. I think they don't like making profits very much. So there's an economic rule for you: If you don't want to make a profit, don't operate a company.

I spoke at length to the company, which said that my brand had been discontinued. A couple of phone calls later, I found out that the stuff is widely available in the US and in Europe. This gives us rule number two: never take the first answer you receive as the truth. This discovery led to me becoming a world centre for the import and export of tobacco. It's entirely legal, which leads to rule number three: don't do anything that isn't.

While whining to my brother about this, I learned that he quite frequently travels to Europe from his home in the UK. He offered to source for me all the tobacco I needed, tax-paid, since the Europeans tax the stuff lightly. I could pick it up whenever I visited London, he said. Hell, he said, I could have so much that I could sell it in Bermuda, after paying import duty, at a profit. Would that I could, but that would be illegal (see rule three).

Say for a moment that I could sell it in Bermuda. Buying something relatively cheaply in one market and selling it at a profit in another market is called arbitraging. That's a technical term, often applied to stocks and other financial instruments. Now you understand it. See? I'm delivering on my promise; doing so is rule number four.

Charles Ponzi, by the way, planned the scheme that now carries his name based on arbitrage. There is in this world a coupon that can be traded for one stamp in almost any country on the planet. It's called an International Reply Coupon.

Ponzi found out that the coupons cost quite a bit more in the US than they did in Italy. He invited investors to send him money so that he could buy Italian coupons cheap and sell them, at a profit, to Americans. That was quite legal. The problem was that the authorities found out what he was doing.

The Italians then raised the price of their coupons to match those in the US. Ponzi didn't tell anyone that his scheme was now not going to work, and kept taking money from new investors. He used it to pay old investors a huge rate of return. People were so pleased that they told their friends to invest in Ponzi's scheme.

Eventually, he was caught, and that was the end of that. Robbing Peter to pay Paul is now called a Ponzi scheme, and people such as Bernie Madoff eventually end up in jail when they try to operate such a scheme. Another rule: if something sounds too good to be true, it probably isn't any good at all.

Back to my brother. He mentioned that he and his wife smoke one of the two horrible brands of tobacco that is on sale in Bermuda. The duty-free figure he pays is much higher than the stuff costs, duty-paid, on the Island. So now, whenever I travel to London, which I do three times a year, I carry his tobacco in and my tobacco back. The rules say that one may cart certain amounts of tobacco products around, so long as they are for personal consumption.

So, I am now at the heart of a giant tobacco-shifting exercise that shows you how a free market works. It also illustrates a point about how taxation works. It is with great joy that I am about to explain this to you, because if more people understood it, there'd be less chance of Bermuda introducing income tax.

Of the three smokers in this story, two live in Britain, which applies the highest level of tax on tobacco of all the jurisdictions I have mentioned. Between the three of us, none now buys so much as a single packet of tobacco in Britain, ever. Here's the rule: the higher the tax rate, the less revenue it yields. We're just three schmucks, and we've figured out a mechanism for defeating the UK taxman. Imagine what a company with a crew of highly-paid tax attorneys could do.

OK, you can bring the kids back in now. They're going to want to know what we were talking about, so tell them it was arbitrage and comparative tax rates. They won't stick around.

Oh, and by the way, the tobacco thing has worked so well that this week I went to France and bought 10 pounds of the stuff, a story I'll tell you some other time. I'm now extending the concept to certain lines of groceries. I already save enough on these trips to pay most of the airfare.

The groceries thing will push me over the top. I'll fly for free. This brings me to the final point of the day: sometimes, the people you think are crazy, aren't. Sometimes, the people who have silly haircuts and weird thought processes know things you don't. Sometimes, such people are smarter than the average bear. Let that be a whole series of lessons to some of you.