The extent of the Bernie Madoff gang criminal enterprise and its victims at this point are known to be outrageously large, though still undefined. What is unbelievably strange is that for 30 years Mr. Madoff’s “investors”, and for that matter the SEC, all considered a consistent 10% profit in good and bad markets to be not only “normal”, but to be the mark of a shrewd professional money manager.
How many money managers are there that are producing consistent returns of 10% in both good and bad market years over several decades? I’ll take a risk, step outside the box for a minute, and suggest that any money managers that have been providing such consistent market-smoothed returns would be the next place to look for a Ponzi scheme.
As I mentioned to my FBI agent brother-in-law from Minnesota: When we’re out on the lake and catch a big fish, almost as soon as we land the fish, we’re thinking about the even bigger one that’s still down there. In the case of Madoff, he confessed. What situations are still out there that haven’t been confessed?
Milton Freidman coined the phrase, “There is no free lunch.” It applies to the competitive investment market as much as the lunch table. The corollary to competitive market is the concept of “regression to the mean”. Intense competition in the marketplace causes strategies that produce excess profit to become widely known, exploited, and pushes the resultant return of that strategy toward the mean return of the market.
Think of the audacity of Madoff’s “investors”. They thought that because of their social position, financial standing, and special relationships, they had become eligible for investment in a fund managed by a man who was always able to produce exceptional returns.
What “sophisticated investor” believes that a money manager, maybe even with a bit of exceptional technology oomph, can consistently provide excess market returns? It’s widely published in financial, economic, and business literature that there is no documented evidence of any investment manager consistently beating the market average.
So what is an investor, or the SEC, to think of a manager that doesn’t have a transparent investment strategy, but produces long-term exceptional returns? I’d say they should think “crime”. And if they don’t think crime, they are in denial. And if they’re in denial about the status of their money, then they’re likely going to be parted from it.
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