Whenever I see an article like this one, it makes me shake my head at our inherent limitations as a Species. We are easy prey for fast talking hucksters; We are excitable creatures, with herd-like tendencies, both dumb and greedy. That’s why bubbles reinflate after crashes, why traders make the same mistakes over and over again.
As long as Investors still get too excited by thoughts of what are (obviously) unsustainable gains, there will be criminals waiting to take advantage of our own avarice and foolishness.
Here’s the money quote:
"Today, the S.E.C., the Justice Department and a court-appointed receiver are
still trying to unravel what happened. Investigators now say they believe that
more than $200 million of investors’ money has vanished, possibly making this
one of the largest hedge fund frauds ever . . .
While the [KL Group] funds’ managers blinded investors with records showing supposedly
dazzling returns, the money was actually being frittered away in bad trades or
simply stolen, according to the court-appointed receiver, the law firm Lewis
Tein . . .
The aura of success and exclusivity around the firm was so strong that
investors often begged to be let into its funds, some of which were said to have
astounding annualized returns of 125 percent for several years. (emphasis mine)
How’s that for dazzling returns? Even Donald Trump, who has managed to lose money for his investors in typically surefire investments such as NY Real Estate and/or Gaming, was smart enough to avoid the sucker pitch:
"While Palm Beach is still abuzz about the collapse of KL, few investors want
to acknowledge that they were caught up in the frenzy. Donald J. Trump, who owns
several properties in the area, said in an interview that he had been contacted
about investing in the fund but didn’t because he thought the returns were too
good to be true. (emphasis mine)
"These guys duped a lot of people down in Palm Beach, smart
people with lots of money," Mr. Trump said. "These people feel they were conned,
and they’re embarrassed. They just don’t want to talk about it."
The bottom line is this: Anytime anyone tells you people are rational economic players, or insists how perfectly efficient the market is, show them this article.
We are but slightly cleverer, pants-wearing primates . . . and, apparently, not a whole lot more.
Paradise and Money Lost
NYTimes, August 14, 2005