Some More Madoff

The $50 billion Ponzi scheme by Mr Madoff has caught world wide attention, including this modest blog.
In comments, Mr Bikramjeet Singh said “The superlative returns offered by Madoff were always seen with an eye of suspicion from the very beginning, but for the greed of getting higher and higher returns. Many of the investors should rather blame their greed rather than anything or anybody else.”
While this observation makes a lot of sense, it is not factually correct as far as the Madoff scheme is concerned.

The investments with Mr Madoff offered normal, modest returns. The returns were ‘assured’ which was the real attraction. Investors thought Mr Madoff had developed a strategy of obtaining reasonable returns on a steady basis. There was no greed here. What worked was Mr Madoff’s reputation as an astute / reliable trader.

Paul Krugman, noble prize winner this year, talks about the Madoff failure in his blog here .

Mr Krugman says :
“Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.”

My Notes: Indian investment bankers, brokers and analysts are no different. If some one is making a lot of money, or claiming to make a lot of money, our friends immediately start singing praises. This happened in the IT boom in 2000, and, again in the 2008 bear market. I have always viewed with suspicion, claims made by the rich. For this reason, I rely on charts for my decision making. Charts represent human psychology – a much better barometer of market movement. At least, it is superior to the ‘lies, damned lies and statistics’ given out by the analysts.