Lessons from Bernie
Do I have a deal for you.
I will manage your money.
I don't take just anyone. In fact, I turn away a lot of business.
I make money for my clients in good markets and in bad.
The risk is low. The returns are high.
Just one thing: if you invest with me, I will tell you nothing about how I do it. It's very complicated and you wouldn't understand it anyway.
Your money won't be held at an independent custodian, like Charles Schwab or Fidelity, where you can access account information 24/7. I will be the source for all your information.
My credentials are stellar. My offices are magnificent.
Are you in?
Over $50 billion in assets, from the most sophisticated investors in the world, said "yes" to this pitch from the newly disgraced Bernie Madoff. Among the biggest dupes were "fund of funds"-- hedge funds, whose sole claim to fame is their much touted ability to select and monitor the performance of hedge funds managers.
There is precious little we can do but express sympathy for the hapless souls who entrusted their life savings to Mr. Madoff. They have lost everything. While we can all relate to their plight, only they understand the pain of his betrayal.
What lessons can we learn from this debacle?
1. No one has the magic bullet. Investors who believe they can get the returns of the stock market with the risk of Treasury Bills are on a fool's errand.
2. Expensive and elitist are negatives in the investing world. Basic and low-cost relate positively to superior returns.
3. Convoluted and complex does not mean superior and profitable. Numerous studies have shown that few retirement plans beat the performance of a simple index of 60 percent stocks and 40 percent bonds.
There is a more fundamental issue which is worthy of serious consideration:
Why do so many highly intelligent, very sophisticated people feel so powerless when it comes to investing? They could easily invest themselves, directly with reputable fund families like Vanguard, Fidelity, T. Rowe Price and Charles Schwab, in a globally diversified portfolio of low cost index funds.
Or they could retain a "fee only" advisor who could assist them with their asset allocation and put together a portfolio of index funds, passively managed funds or Exchange Traded Funds, and add more value by guiding them through difficult times by focusing on long term data.
Instead, they get sucker punched by commission based brokers or advisors who peddle expensive, actively managed funds that under perform the indexes over the long term. Or by the variants of Bernie Madoff, who have all of the accoutrements of financial expertise but the cunning of a sociopath.
Perhaps this is the most meaningful lesson we can learn from Bernie:
The difference between criminal conduct and business as usual in the securities industry is a fine line. Bernie clearly did not have the expertise he claimed. At some point, he stopped trying.
Brokers, advisors and hedge fund managers who claim to be able to "beat the markets" are doing nothing illegal, but their expertise is no greater than Bernie's.
Both are engaged in variants of the same scam.
Investors are the losers.
They just lost bigger with Bernie.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.
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Shades of Ivan Boesky.
Rule of thumb: Whevever a financial guru type is consistently outperforming everyone else, and the only explanation for his performance is that he's way, way smarter than everyone else, you can bet that he is NOT smarter than everyone else; he's either cheating or stealing. Unfortunately, Mr. Madoff's mode of stealing was billions of times more damaging than Mr. Boesky's mode of cheating. Nevertheles, the rule is the same in both cases.
Here's another "lesson we can learn from Bernie."
The Securities and Exchange Commission engaged in HIGH CRIME.
On not just one but on numerous occasions, when their employees recognized and attempted to interdict these criminal actions, "nothing happened." In other words... the enforcement action was squelched.
In other words: "aiding and abetting."
If the SEC had timely pursued the enforcement actions that their own subordinates were attempting to bring to bear, "this would not have happened." But many billions of dollars were paid out to Senators and Congressmen (and to other "civil officers") who are today working busily to wash their hands of this excrement.
And we ... "We, the People" ... now stand as victims, as Plaintiffs.
I ask you very plainly: "is it somehow 'wrong' for any one of We to demand ... justice?"
Is it somehow 'wrong' for any of us to demand proper restitution from a Crime, no matter how outrageous that Crime might be?
My answer is very, very simple:
No.
Soon everyone with incomes below $250,000 a year will get to enjoy Economic Slavery .
When the Inflation rate hits 900 % you will see what the U.S. Government hasd been dong to other countries arounf the world with their loans from the World Bank.
'The difference between criminal conduct and business as usual in the securities industry is a fine line.'
I doubt that hedge funds in general make their day-to-day operations transparent enough so that there is no unjustified transfer of wealth from new or less important investors to old and more important investors. There might be no actual distinction between discretion about normal operations and a Ponzi Scheme. Bernie was an exception only because he fully admitted to redistribute wealth systematically (and simply) as in a Ponzi Scheme.
'No one has the magic bullet'
I don't think that is true, it is more like, those who have the magic bullet are simply not listened to. There are times when all assets are too expensive to be good investments (in 2005-2007) and there are times when everthing is so cheap you cannot decide what to buy first (in a year or so). The information is there, only reason is not.
Sympathy for the "wealthy sophisticated investor" hapless souls?
These people are better described as the greedy, I do not care how you make my money earn high returns, just make me money crowd.
The blame for the subprime fiasco was initially put on the poor and unsophisticated mortgage applicants, but we soon found out that the real cause were the swindlers in white collars of wall street.
Well it looks like the rich and dumb have been fleeced by this sophisticated swindler. I don't feel sorry for any of the people who dealt with this crook.
We need to keep in mind that "many highly intelligent, very sophisticated people" also became followers of Guru Bhagwan Shree Rajneesh in Oregon during the 70s and gave him mountains of money (I knew many in fact who were professionals). You couldn't reason with these people if your life depended upon it because their intelligence and sophistication happened to be no substitute for their lack of wisdom (Skt. prajna).
Well framed.
But while I would defend someone's right to believe in a cuckoo religion, I will not defend the right of someone to steal.
And that too is a fine line. ;-)
You have a right to be a sheep -- but not to get flocked.
"The difference between criminal conduct and business as usual in the securities industry is a fine line. "
This is like saying that the difference between strong disagreement and murder is a "fine line"
If this is true, then we have yet another reason to demand and get a major overhaul of our regulatory system, these people need to be scrutinized constantly, and every single detail of their financial operations needs to be revealed and examined. They are not entitled to privacy in these areas. It's obvious that the financial system is riddled with crooks, and there's no one protecting anyone.
Too bad if the regulations inhibit the ability to some people to make large fortunes. If they are brilliant, their minds would be much more useful in scientific and technical areas. It's not in our national interest to have these "geniuses" permitted to pursue money in this way. We need scientists and engineers, not self-serving financial wizards.
Society needs to withdraw the permission to wheel and deal that these people enjoy.
Maybe they should have watched "The Riches".
Why do so many highly intelligent, very sophisticated people feel so powerless when it comes to investing? They could easily invest themselves, directly with reputable fund families like Vanguard, Fidelity, T. Rowe Price and Charles Schwab, in a globally diversified portfolio of low cost index funds.
I did just that---I'm only down 45%---great advice!!!
Can someone explain to me where the money goes that is lost in investments? All the regular people who lost money from their 401Ks, where did the money go? Someone has it. It was tangible when it was deducted and invested. Who has it?
Madeoff is the poster boy for American finance.
What is the lesson the world is taking away from this?
US markets can't be trusted.
Reminds me of a great class: "Behavioral Decision Theory" taught by Fred Russo and Dick Thaler (before he went to Chicago) at Cornell.
aka "Why even smart people make economically irrational decisions" 101.
I'm not talkin the poetically named Madoff -- I'm talkin people who signed their lives over to him.
The Fundamental Attribution Bias: If I believe something, it is more likely to be objectively true.
Cogito, ergo Veritas?
As the nominal strategy of "manager picker" is debunkable (as has been by Index Funds Advisers, Solin, et al), it stands to reason that a strategy of "swami-like-secretive-manager-picker-who-won't-tell-you-anything" should be even more suspect.
Willfull blindness is not a sound strategy.
REGULATE!
Wall street style investment is quickly looking sour for most people. The taint will have it's effect on the markets for years to come. Just as well. Small time joes do not belong in the markets. It is a wealthy persons game all the way. You have to have the money and the time to do it right and even then you could lose your shirt very easily such as in the current crisis. Trying to sell a 60/40 scheme is of no use because even that is buildt on rapidly shifting sands. Conventional market strategies are dangerous in unconventional markets. Basically the system is broken. Buying and selling air is what it is all about, and that is what a lot of people are finding out about now. Haha, the futures markets are beginning to look better and better every day. Now that is gambling but at least if you fall on your sword it is your own and the blow does not come from someone like Bernie. I think it is more than a proven fact that most of the people in the investment industry do not have a clue.
In the early 70s I invested a modest amount in a brokerage account. Two years later it had shrunk by 20 percent. I was young and naive, but the lesson to me was to become a conservative investor. I have stuck by that rule ever since , and it has served me well. Not that I couldn't have made untold wealth in the later years, but it wasn't worth it, to me, the risk.
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