What motivates people to make a bad investment?
- Fear of missing out. (See Bitcoin mania).
- Media hype: Sensationalism sells stories. Mainstream media is in the business of selling advertising. Period. Especially online.
- Entertainers as “experts”. See Jim Cramer. You have a Harvard pedigree, law school, created a hedge fund, and controversy swirls around you. Yet, Mad Money has a stated mission to educate about markets, etc. Right! Through all the shouting shines a massive ego, an entertainer —not worth the print to talk about.
- Suze Orman? She’s a former junior account executive/broker who parlayed success as a writer and entertainer. Her knowledge of complex financial issues is slim, at best. This is not a financial planner for your life events.
- The Motley Fool(s). Aptly named. Hardly objective, they have “guest writers” and board members and contributors who are nothing but shills for their own investment products. Warning: If you take your primary investment advice from someone who claims to be “motley”, or a “fool”, you deserve what you get.
- Bandwagon: Get on it, it’s media driven, which creates the herd mentality.
- The “best” money managers—a number of financial publications every year honor the "best" something. The measurement is not performance or client satisfaction or personalized advice, but assets under management or revenues, called production, by the big financial firms.
- Titles: “Senior” or “Executive” are titles handed out by firms (or self-anointed) that generally tie to production. There’s no title that stands for ethical experience.
- Designations: Courses grant designations. There are literally hundreds of them. Beware of the financial advisor who has so many designations on his/her card, that they have to be continued on the back of the card.
- Marketing: Self-promotion. Why do so many advisors write articles? To get their name out. Nothing wrong with that, but it’s not a reason to hire one.
So what is the motivating factor? Greed.
What drives greed? Ego. All of it. The “get rich quick mystique,” “Read our secret method”. “Only you”, “A limited time only,” “Learn from the best..”, ”10 ways you can..,” Fear…. you name it. Ego is the driving factor psychologically.
Why did investors lose $18B to Madoff? I knew Bernie; all my friends knew Bernie. He was glib and smart, and an insider. There was a reason why we gave him money to steal. He was the ultimate insider, the exclusive club only the very rich could afford. Good (not great) returns (9-14% a year)—on paper. He was touted by insiders as a bond surrogate because of his consistency. A mystique surrounded him and those who couldn’t get inside told stories shrouded by hushed tones of enormous returns. No they weren’t enormous. Not even on paper. How could I not give him money? He was the stuff legends were made of—literally. Ego drove the decision to give Bernie money. Entirely. I deserved to lose money to Bernie. We all did. Don’t blame the crook just because he was smarter than the rest of us. We just didn’t know he was the Teflon sociopath.
Of course, ego brought Bernie down. His investment methodology: split strike conversion with OEX puts worked. Our analysts proved that it would work—most of the time. The ego problem Bernie had was that he couldn’t bear a bad month (or day for that matter). When the inevitable downturns did come, he concocted false returns to make himself look better. He knew he could make it up, because he always did. Until he didn’t.
After he was hauled away in cuffs by the FBI, I enlisted to help represent 44 investors I personally knew who lost a total of $70 million to his fraud. I did it pro bono, but I had a seat at the table (in the back) and heard and read every scrap of testimony, claims, counterclaims and pleadings. Judge Denny Chin did a great job navigating a convoluted story peppered with media play of some of the Madoff mystique which obfuscated the truth. I read, (and still read) every shred of paper put out by Irving Picard, the appointed Madoff trustee in bankruptcy who has returned $10.15 billion to victims out of the $12.8 billion the trustee has recovered so far (December 2017). Baker Hostetler has earned their $1 billion in fees. They’re not done yet.
This year will mark 10 years since Bernie was caught. It is not over yet. Picard isn’t done collecting or distributing. The process will outlive me and Bernie.
I assure you that you will read or have read outrageous stories and crazy conspiracies and far larger numbers, and a lot of other garbage made up for movies or books or (yes) articles. Do not believe most of it. Everything I wrote here is first hand knowledge.
I was there.
To round out my 45-year career in the investing world, I created a public charity to provide investing expertise for free to anyone. We earnestly believe that if we can show Mom and Pop sound unbiased, un-conflicted financial principles, investment strategies, guidance and advice, we will help them protect their finances and their future. It’s that simple.
The MoneyCulture Initiative is found at moneyculture.org.