Ben Stein is some kind of seer:
About two years ago, a little delegation from a major investment bank arrived at my home in Beverly Hills. These nice young people were from the bank's "wealth management division."...
They told me that if I invested a certain sum with them, they would make sure that a large chunk of it was managed by a money manager of stupendous acumen...
I thanked them for their time and promptly looked up Bernard Madoff online. Nothing I saw was even a bit convincing that he had made a breakthrough in financial theory. Besides, this large financial firm was going to charge me roughly 2 percent to put my money with Mr. Madoff's firm...
I checked with my investment gurus, Phil DeMuth, Raymond J. Lucia and Kevin Hanley. None of us could see how Mr. Madoff could do what his friends said he could do. I politely passed...
This whole story is very odd. Ben Stein has spent many years trying to make a name for himself as an investment guru, going on the television and writing columns and books on the subject, and acting as a prominent booster for index funds generally and for Dimensional's funds in particular.
The delegation from the wealth management division of the major investment bank surely knew all this -- and yet they went to Stein's home and pitched him on the idea that he should just sit back and leave his money with them?
What's more, Stein says that even before he gave them a penny, these private bankers were extolling the virtues of Bernie Madoff as a money manager. Now that's even weirder. For one thing, "major investment banks" are conspicuous by their absence when it comes to the roster of Madoff's victims. Look at the banks on the list -- Banco Santander, Bank Medici, Fortis, UBS, HSBC, Natixis, and so on. There are lots of them, but none of them can really be considered investment banks. Some of them have investment-banking arms, but those arms don't, to my knowledge, have their own wealth-management divisions.
In any event, faced with some suits offering to manage his money for an annual fee of 2%, Stein didn't simply say no; he invited them into his home, took their offer seriously, and then roped three of his friends into looking into the offer and trying to replicate Madoff's returns.
Why would Stein spend so much time listening to and second-guessing the claims of private bankers promising improbable returns? After all, he knows full well (or says he does) that such claims never pan out:
I belong to a number of country and town clubs. In all of my years at them, I have never gotten an investing tip that made money. In fact, as far as I can recall, I have never gotten a tip from any source that made me money, except for my former agent's wife mentioning Berkshire Hathaway (BRK.A), Mr. Buffett's company, 30 years ago.
Does Stein really think that the wealth management division of a bank is any more likely to have discovered a great investing tip than anybody else? After all, he tells us that even hedge fund managers -- who are paid vastly more money than private bankers -- generally fail:
One great advantage of being 64 is that I can remember the early hedge funds of the 1960s. They, too, were supposed to turn water into wine, but they fell hard in the stock market meltdown that also laid low the Nifty Fifty -- another 1960s' idea that 50 carefully selected stocks could long beat the indexes.
I can still recall visiting an early hedge fund pioneer. He had a small stereo playing rock music in his office as he tried to make millions. That's how cool he was. I don't know where he is now and I don't want to know.
Clearly Stein isn't giving us the whole story here -- if he was, he would have named the bank in question. But he's not the only person telling "I said no to Bernie Madoff" stories. He should be treated like anybody else with such a story: pay very little attention. People turn down investment opportunities, both good and bad, every day. And the main thing we learn from Stein's story is not how smart he was to say no to Madoff, but rather how much he wanted to believe: when he thought it was too good to be true, he still went to three different friends in the hope that they could change his mind.
Then again, it's public knowledge that Stein believes in fairy tales like Intelligent Design. So none of this should be much of a surprise.