My bottom line is, study markets and look at how investment instruments typically perform. If something is too good to be true, it probably is.
I realize this is thread dedicated to pissing on Madoff’s grave (happy to add my pee), but having said that, Ponzi schemes always reveal something a little unflattering about the victims as well. I don’t mean that they deserve to be robbed - not at all. They are victims. But they wanted to believe in unicorns.
I don’t know what wikipedia link madness happened here, but that’s clearly a picture of Madoff, not Markopolos. I guess since that’s the only picture on the wiki page, it added it to the link preview?
Kinda, yeah.
Unicorns that pooped gold.
They certainly get credit in my book for avoiding the very tired “made off” pun.
I think just regular unicorn poop would be more valuable than gold?
That’s a cliche which has a lot of validity to it, but not in the case of Madoff. His returns were lower than typical Ponzi scheme returns (~14% annually) and there are a lot of legitimate investors who did better. What made Madoff suspicious was the combination of very-good-but-not-incredible returns and consistency of results. His explanation of this was the use of collars in his “split-strike” strategy, which is what Markopolos determined was not mathematically viable after looking closely at his numbers and doing the math, but this was not an obvious “too good to be true” situation.
The thing about Madoff is that unlike a lot of Ponzi schemers, he was not a fast talking salesman with nothing other than ostensible payouts backing him up. He was a very respected guy with a very solid track record. Of all the thousands of investors in the market, there are always going to be some people at the top, who do better than the vast majority of investors on a legitimate basis. There was no reason to think that Madoff couldn’t be that guy.
I recall an article or perhaps a post here some years ago about Madoff. It said in effect:
Most of his bigger investors totally knew he was cheating. They didn’t know how, they didn’t care how, and they didn’t try to investigate how. The only thing they cared about about was that he was cheating somebody other than themselves.
That’s the business ethics at the top of the finance game. Everything’s a con; the key is to be (or be allied with) the conner, not the connee.
IMHO virtually none of Madoff’s bigger investors knew he was cheating. Possibly none at all.
I think some people start with the conclusion - that “that’s the business ethics at the top of the finance game” - and then back into the assumption that most of the big investors knew he was cheating entirely on that basis.
It seems pretty clear that Madoff’s own sons - who even worked in his business, albeit not on the investment side - didn’t know he was cheating (they turned him in against his wishes as soon as he told them).
That doesn’t really make sense unless they didn’t know how he was cheating. It makes no sense to put your money into a Ponzi scheme if you know it’s a Ponzi scheme. Even if you think you have an inside track to get your money out before it collapses, that just may not work - the money can be clawed back.
I just semi-quoted the source; I’m not equipped to fully defend it.
As to “know”, there’s know with certainty given direct evidence and there’s “know” as in strongly suspect on the basis of reasonable thinking. e.g. I “know” Trump cheated on his income taxes despite my never having laid eyes on a single one of his tax forms. The person who I did reference was somebody with a reasonable claim to insider status on Wall Street. If I could remember where I saw it I’d certainly cite it so we all could read his thesis and attack or defend the author directly.
A lot of people didn’t believe Jack Welch’s perfectly called earnings at GE quarter after quarter, year after year either. But that didn’t stop them from trading on the belief that enough other people believed them that they weren’t going to be comprehensively investigated.
As to whether folks knew or “knew” Madoff was running a Ponzi scheme, that’s a different question. The fact Markopolos’ employers sent him on a mission to duplicate Madoff’s methods says a) they were implausibly good given conventional practice at the time, and b) they weren’t so outrageously good that it had to be a pure con like a Ponzi scheme. It might well have been insider trading, exploiting a bug in the exchange’s trading platform or some other form of cheating.
This makes no sense.
The fact that Markopolos’ employers sent him on a mission to duplicate Madoff’s methods says that they thought it was a legitimate strategy which they could replicate. If they thought he was doing insider trading or some other form of cheating they wouldn’t have asked Markopolos to analyse and replicate it.
I disagree completely. His results were all Markopolos’ employers could see. They hoped to find his methods, acting on the assumption he was using legit techniques. Which assumption their research eventually disproved.
My point in bringing them up was not that they started out believing he was running a Ponzi scheme. That’s not my thought at all.
My point about them is simply that them starting their investigation is proof that at least some other investment professionals believed Madoff’s results were extraordinary. Efficient market theory pretty well demands that any overperformance be transitory at best. Sustained overperformance is either a truly new skill, or a variation on cheating.
So if some advisor is promising, and seemingly delivering, sustained outsized performance, he’s either got some serious secret sauce (which shouldn’t last too long before being copied), or he’s cheating.
A lot of “smart” money invested with Madoff. They are just as aware of the previous paragraph as you and I are; probably more so, or at least to more decimal places of accuracy.
The statement that “Efficient market theory pretty well demands that any overperformance be transitory at best” is incorrect. There will always be individuals who consistently outperform the markets. Warren Buffet outperformed the markets for a long time and no one thinks he’s cheating.
If Madoff had a secret suace, then people might be tempted to try to copy him, which is exactly what Markopolos’ employers tried to do.
Markopolos did in fact come to the conclusion that Madoff was cheating one way or the other, but that’s not any indication as to what people who didn’t look as closely might have thought. Even Markopolos is not claiming it was obvious at first glance that Madoff was cheating - only that it became apparent when he looked closely at the numbers. Other people didn’t look closely at the numbers.
Bottom line is that all sorts of sophisticated people who were not themselves invested with Madoff (and hoping to gain from his con) did not assume he was cheating. There’s no basis for your accusation.
Dead?
Moving on…
An interesting book that covers Madoff in just one chapter is Why They Do It: Inside the Mind of the White-Collar Criminal. Unlike some of the other cases detailed in that book Madoff pretty clearly comes across as a sociopath. He regretted getting stuck in his situation and very much regretted getting caught but he didn’t seem to have even an ounce of empathy for his victims or possibly anyone else.
I have recollections similar to LSLGuy. And it isn’t like the people investing in Madoff were monolithic in their motivations. The point as I recall it, is that some investors thought Madoff was cheating. (I remember the suspected scheme having its own name) They didn’t think it was a ponzi scheme but something with leveraging margins or something something. Anyway, the point was there were some people who thought he was cheating in a certain way and invested with him because of it. They just didn’t know he was cheating in a different way (and cheating them).
A quick google brought up this:
And actually many of Madoff’s investors knew something was fishy. They just thought he was “front running.” That’s an illegal practice where he would know the orders that others were placing and then invest right in front of those. Think of it this way: if you know there is going to be a major order to buy Coca-Cola stock, you could decide to buy Coca-Cola just before the big order hits. When that big order does hit, it will likely increase the stock price, and you benefit from that rise. It’s totally illegal, but it’s also a great way to do really well in the stock market.
Does anyone remember the “Friends Helping Friends” scheme from 1996? I worked with a woman who was caught up in that and insisted that it was failproof.
How did this guy not get a Trump pardon?