Bernie Madoff and the art of financial alchemy
Aside from, perhaps, Ruth Madoff, I don't think anyone feels Bernard Madoff's 150-year prison sentence is too severe. Most of us, in fact, would be delighted if he spent far more than a century and a half in someplace way hotter than jail.
Aside from, perhaps, Ruth Madoff, I don’t think anyone feels Bernard Madoff’s 150-year prison sentence is too severe. Most of us, in fact, would be delighted if he spent far more than a century and a half in someplace way hotter than jail.
But just because Bernie is out of the investment picture, don’t believe for a second that the hope that Bernie exploited so wantonly is gone too.
That hope — shared by the sophisticated and the not-so-sophisticated, the rich and poor alike — is that somewhere in the financial world there exists an investment genius or an investment approach that will deliver reliable, better-than-average returns, no matter what.
Believing in the impossible or the improbable is human nature. During the Middle Ages, for example, the hope that base metals could be rejiggered into gold busied generations of alchemists. That was crazy, of course, but what about the crazy dreams, such as human flight and landing on the moon, that have come true?
So even if consistent, better-than-average returns are unlikely or even impossible, maybe — just maybe —there is someone out there who can do it. And since we all seek certainty and absolutes in a world of randomness and chance, how can we not follow someone who promises such returns with boldness and certainty? (This tendency, of course, has had both wonderful and horrific consequences in the wider world beyond investments.)
For money managers who deliver on their promises for at least the short run, the rewards are great. Just think of all the sure-thing investment ideas that have grabbed the public’s attention — and their money —over the years: nifty-50 stocks, limited partnerships, tech stocks and high-yield bonds, to name a few that come to mind.
All of these investment ideas had proponents who made clear, logical and emotionally moving cases for their investment choice and delivered handsome returns — for a while. Then, circumstances changed and the investment climate shifted and the sure-thing fell apart.
In Bernie Madoff’s case, of course, the whole shebang was a fraud. In other investment cases, however, there was no fraud, just a new, less welcoming reality.
The latest casualty of reality seems to be the Ivy League endowment funds that looked like winners over the past few years because their managers concentrated on alternatives. Hedge funds, real estate and private equity were the reason the managers of the Harvard and Yale endowments looked like geniuses — until recently. Now, the Ivy League endowment managers look less like brilliant financial engineers and more like the most recent practitioners of financial alchemy.
Human nature, it seems, is slow to change. Until we learn more about the financial markets, and if we continue to hope that there’s someone out there who can turn ordinary returns into something that glitters, we’ll be suckers for the Next Great Investment.
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