A FINANCIAL SERIAL KILLER kicked into gear. Investors scrambled to sell anything they could... including their Madoff fund holdings. By its nature, a Ponzi scheme constantly needs new money coming in the door... and if there’s too much flowing out, well, that’s a problem. Madoff gave himself up when he knew he wouldn’t be able to meet redemptions. basis of what our gut, rather than hard logic, tells us.
But the flip side of that indicator – something that our gut tells us doesn’t feel right – is worth listening to. An alley that looks a bit too dark... a potato salad that may have been out in the sun a bit too long... or an investment record that looks a bit too good to be true... even if it’s based on nothing more than a gut feeling, listen to your tingling Spidey sense. An alley that looks a bit too dark... a potato salad that may have been out in the sun a bit too long... or an investment record that looks a bit too good to be true... even if it’s based on nothing more than a gut feeling, listen to your tingling Spidey sense. “Some folks knew better,” Erin told me. Salomon Brothers, one of the top Wall Street brokerages during the Madoff era, as well as Goldman Sachs, didn’t do business with him. For her 2001 Barron’s article, Erin talked with a number of well-placed Wall Street players who sensed that something was awry. And the fact that Madoff’s fund was using a two- person accounting firm to audit its books – rather than a brand-name accountancy that delivers automatic credibility – should have set off alarm bells. Market corrections showwho’s swimming naked. In late 2008, markets were tumbling as the global economic crisis
But if not for the market collapse then, Madoff’s fund could have continued... indefinitely. If something seems too good to be true... A 2006 Fortune magazine article described Bill Miller as “one of the greatest investors of our time.” The $20 billion mutual fund that Miller managed had outperformed the S&P 500 Index for 15 straight years, a feat never before accomplished. But then mean reversion reared its ugly head. The next five years – the magazine-cover curse at work – Miller’s fund lost over 30%. Fund research firm Morningstar ranked Miller’s fund dead last among the 1,187 similar U.S. equity funds it tracked over the period. The thing is, Miller didn’t change his investment strategy. His investment team didn’t change. Markets didn’t go haywire. The boring reality is probably that Miller’s luck simply ran out... and his performance reverted to the mean. But unlike Miller, who was honest and lucky (for a while), Madoff never – ever – experienced even a single down year at all since, well, he wasn’t investing. That’s not good luck... It’s too good to be true.
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May 2021
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