February 20, 2009

Investment Strategist of the Decade award goes to

Bernie Madoff, who is now said by the authorities to have made zero trades over the last 13 years with all the money he received to manage. Granted, who knows if that's true, and he still managed to blow it all, but I'm just sitting here thinking about what if I had cashed in everything I owned in 2000 and buried it in my backyard, instead of prudently investing it in index funds and CDs and the like. I could have had my own private non-trading Madoff fund, with myself as sole investor and sole (non-acting) hedge fund manager. Would I be ahead?

Personally, I've always been sympathetic to the poor sap slave in The Parable of the Talents who buries the money his master has given him to invest, while his smarter co-slaves get rewarded for earning 100% returns on investment. The dumb slave just gives the one talent of money back to the boss with no ROI and gets in big trouble:
Then the one who had received the one talent came and said, ‘Sir, I knew that you were a hard man, harvesting where you did not sow, and gathering where you did not scatter seed, 25 so I was afraid, and I went and hid your talent in the ground. See, you have what is yours.’ 26 But his master answered, ‘Evil and lazy slave! So you knew that I harvest where I didn’t sow and gather where I didn’t scatter? 27 Then you should have deposited my money with the bankers, and on my return I would have received my money back with interest! 28 Therefore take the talent from him and give it to the one who has ten. 29 For the one who has will be given more, and he will have more than enough. But the one who does not have, even what he has will be taken from him. 30 And throw that worthless slave into the outer darkness, where there will be weeping and gnashing of teeth’”

Jesus would have been a pretty demanding hedge fund client.

(Yeah, I know it's metaphorical, but still ...)

My published articles are archived at iSteve.com -- Steve Sailer


robert61 said...

Imagine living your life for thirteen years, knowing that the basis of your reputation is 100% pure BS. That's impressively bent.

Who ever knows when to stay in or pull out? Index funds don't feel so clever right now, but they don't compare with getting robbed by Bernie Madoff.

Chief Seattle said...

That there were no trades is amazing, if true. How did that escape scrutiny, even among people who thought it was legit but wanted Madoff's trading business? How did that get passed the accountants? Didn't any bank ask why the money was transferred to personal accounts rather than brokerage accounts?

I was thinking today about how that Markopoulous (sp) guy said that there was zero enforcement from the SEC during the Bush administration. And how the thing that makes the most sense is not that the Bush administration was lazy, but that they ran the whole country like a crime syndicate, offering guys like Madoff protection, in return for a cut.

Anonymous said...

"but they don't compare with getting robbed by Bernie Madoff."

Particularly when a number of the victims got charged additional solid fees by their ace advisors for handing their money over to the thief.

Eric said...

I wonder what the hard master would have said if all his money got wiped out in a bank panic.

Eric said...

How did that escape scrutiny, even among people who thought it was legit but wanted Madoff's trading business?

That's what facilitated the whole thing. Madof's company had a trading arm, so he was executing trades all the time for other people, and nobody expected trading business from Madoff since he would have done all that himself. To detect the scam from that angle you would have had to know there were trees missing in a very large forest.

testing99 said...

Last I checked, Bush served only 8 years, not thirteen. So Clinton's SEC was equally as toothless.

Even so, Madoff should have been merely a blip, a guy who fooled a lot of greedy guys chasing returns too good to be true (and they were).

Steve's question is one that has to be answered, by the financial system. Unless people are able to make money over the long run (10 years plus) through index funds, they won't invest, but the need to invest will either morph into China's huge savings problem, or choke off business investment.

People need to be able to invest in "safe" instruments with little downside and guaranteed upside, ala T-Bills. The real risk is not Madoff or market indexes being down (hold for another five years and they might be up, hold for another ten after that and they might be way up, it depends on your age, investment horizon, etc.). If you are close to retirement, your risk profile is low so most of your money should be in T-Bills.

But ... what happens if T-Bills are inflated to worthlessness through massive spending?

THAT is a risk that creates hyper-savings because investment is all a scam (China) and chokes off domestic investment capital. Because no one can trust anyone.

rast said...

For those keeping track, Steve quoted from the New English Translation, so that indicates he probably isn't Catholic.

(cmon, steve, be cool, don't censor this comment)

Anonymous said...

I thought Steve was Catholic.

Surely he can quote from whatever he likes.

Born Again Democrat said...

The parable of the talents is interesting, to me at least, as the earliest statement of the idea of, not just return on investment, but the law of capital markets: publically traded companies that do not maximize there rate of return on investment will be taken over by those that do. We take that idea for granted now.

Jesus was a capitalist theorist, literally. Maybe the first.

Not an economist said...

To follow on Testing99's comment, my guess is that if there is no "safe" savings vehicle, people won't save. That is what tends to happen during periods of superhigh inflation. In fact, I would argue that the reason for the low US savings rate is high inflation, hidden until recently in rising asset prices.

Anonymous said...

Investment Strategist of the Decade award goes to

Karl Rove for engineering the great housing bust in order to win the vital Hispanic Vote.

Jesus would have been a pretty demanding hedge fund client.

At this point, I'm about ready to be nailed to the cross, myself.

Anonymous said...

Not an economist should be an economist, because that is exactly what is happening here. People turned their dollars over into land, stocks, bonds, SUV's, granite countertops, etc., because just holding cash would be stupid with the dollar plunging thru the basement. But then at the end of all things nobody knows what anything's worth. So they flee to the last refuge of gold (up around a K at this point.)

Who is this troglodyte? This buffoon? This terrorist who dares suggest we can trust the government to ratchet back the money-printing when prudence dictates?

--Senor Doug

Jeff Burton said...

What strikes me about the parable is how radically anti-egalitarian Jesus is. Talk about the rich getting richer.

Anonymous said...

I'm a believer, but I have to give it to you!

"Then you should have deposited my money with the bankers, and on my return I would have received my money back with interest!“

LOL. I also hold more sympathies for the one who buried the money, just like the older brother in the lost parable who stayed home. Funny, pastors always rail against these losers, but somehow they seem to make sense.

Anonymous said...

"Jesus was a capitalist theorist, literally. Maybe the first."

I thought he was a communist, or at least socialist? Almost every church portrays him as such. I'm getting confused.

Anonymous said...

Get out of the dollar. Go into yen, silver, swiss francs. The United States is over.

Do it now, before you can't do it.

Might be a good idea to renew those passports, too.

Mark said...

Get out of the dollar. Go into yen, silver, swiss francs. The United States is over.

The pound is at $1.43 per. Not more than a year ago (October) it was north of $1.80. Anyone think the pound is a good deal right now, or is Britain similarly doomed? I'm thinking of stopping by the bank on Monday.

Dutch Boy said...

C'mon, guys! The parable is a cautionary one against mediocrity and complacency; no financial system is described, much less endorsed.

jack said...

That parable of the talents always throws me off too. It was the first sermon I remember as a kid, and I remember how tricked I was by the story and how bad I felt for the scared non-greedy guy who buried the coin. In fact I partly fall for it every time I hear a sermon on it still.