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.
Source:
Paradise and Money Lost
JULIE CRESWELL
NYTimes, August 14, 2005
http://www.nytimes.com/2005/08/14/business/yourmoney/14hedge.html
We may not necessarily be stupid and greedy. People may simply look at what other people do and copy, vs. doing their own analysis. In some cases this may be smart (efficient, rely on people who have expertise one does not have). In other instances, this may not be smart. In cases where people are watching and irrationally copying, eventually someone starts doing independent analysis and thinking and breaks from the herd.
Florida seems to be filled with people who think they can’t lose. Not just the super wealthy either. Look at the numbers of pre-construction houses and condos that are 80-100% investor/speculator/flipper owned that won’t be closing for 18 months from now. This sort of mentality seems to be infectious. By the way, Florida also leads the nation in mortgage fraud.
Norman writes in from Menlo Park CA to say:
W. C. Fields made a movie called, “You Can’t Cheat an Honest Man.”
So true.
Greed is a primary motivation for many people. It’s how KPGM sold tax shleters to large corporate clients that had no possiblity of passing IRS muster, as evidenced by internal memos within KPMG
Some people’s fear and greed are other people’s worry and hope. They wagered 100% for 125% and lost. Sounds pretty ‘fair’ to me.
human nature and free market-liciousness
The economist Barry Ritholtz points to this NYT article on the massive disaster that was KL Group, a hedge fund based on nothing but a reputation that turned out to be wrong. The NYT reports that “Today, the S.E.C., the…
“We are but slightly cleverer, pants-wearing primates . . . and, apparently, not a whole lot more.”
Not a whole lot more pants-wearing?
speaking of greed and stupid:
AP: ‘Panic ensues in rush for cheap laptops’
August 16, 2005 – 15:00 EDT The Henrico County school system is selling 1,000 used iBooks for US$50 at the Richmond International Raceway in Richmond Virginia, when it turned into a “violent stampede,” reports AP. “People threw themselves forward, screaming and pushing each other. A little girl’s stroller was crushed in the stampede. “Witnesses said an elderly man was thrown to the pavement, and someone in a car tried to drive his way through the crowd,” notes the report. “It’s rather strange that we would have such a tremendous response for the purchase of a laptop computer — and laptop computers that probably have less-than- desirable attributes,” said Paul Proto, director of general services for Henrico County. “But I think that people tend to get caught up in the excitement of the event — it almost has an entertainment value.”
Stock Market Rational and Efficient?
The Big Picture has a post about a group of investors in Florida who got taken in by fund that promised returns that were too good to be true. The next time some business school genius tells you that the