A random walk down wall street burton malkiel

IFA's Quote of the Week - 44 (Burton Malkiel)

A random walk down wall street burton malkiel

Step 5 - Manager Pickers


"It's like giving up a belief in Santa Claus."

- Burton Malkiel, 20-20 Interview with John Stossel






Who Can You Trust?

Mark Hebner Addresses Madoff



You’re a Mean One, Mr. Madoff

If Hollywood acts quickly, they may be able to put together next year’s biggest holiday blockbuster: a remake of “How the Grinch Stole Christmas!”

This new twist on Dr. Seuss’s classic might realistically relocate the Grinch’s frozen home of Mt. Crumpit to Wall Street, where its latest and worst financial criminal Bernie Madoff could easily capture the leading role—that is if he’s not cooling his heels in the slammer.  

The town of “Whoville” could easily assume the moniker of “Who’s Whoville” to better reflect the long list of celebrities, politicians, philanthropists, international banks, prominent business executives, sports team owners and average Joes who have just become less than average.

The screenplay might easily be penned by noted Hollywood screenwriter Eric Roth, best known for writing “Forrest Gump”. In an ironic twist, Roth was nominated for a Golden Globe award for his latest work, “The Curious Case of Benjamin Button” on the same day he learned that his retirement assets were cleaned out by Madoff. “I’m the biggest sucker who ever walked the face of the Earth,” Roth confessed to the L.A. Times. If ever a writer needed motivation—it’s clearly present with Roth.

As to the direction and production for the modern-day twist on Seuss, certainly that work is well in the hands of both Steven Spielberg, noted Hollywood director and Jeffrey Katzenberg, who were both duped by Madoff and suffered the loss of millions in personal fortune or charitable assets.

The one potential sticking point with the re-make is that the original story comes complete with a happy ending. If there is a happy ending in this new story, Hollywood will have to get very creative to fabricate one. Certainly, the selling off of Madoff’s assets cannot make the victims whole for the losses they have suffered. The insurance granted by the SIPC of $500,000 is largely viewed as paltry in the eyes of many such victims, but they may very well be lucky to even get that.

More than likely, most of the money is gone. Big-name attorneys will be in court to fight this one out for quite some time. In the final analysis, however, so many of Madoff’s victims will simply have to accept the fact that they were duped—and quite likely, that fact hurts as much as losing the money.

The emotional toll on Madoff’s victims is heavy. Decades-long relationships that were built on friendship, faith, trust and mutual interests with respect to charity and religion appear to have been just one big lie. As the months and years unfold, this revelation has the power to erode the spirits of those who have lost their money as well as their ability to trust.

At the root of all of this pain sits the once (and perhaps still) stubborn belief that active managers can persistently outperform market indexes. The inability for individuals to be content with market rates of return continues to be the well-spring of dissatisfaction for most, and agony for many.      

In an interview with John Stossel, Burton Malkiel describes the reluctance to give up the belief that active managers can outperform a market index is “like giving up a belief in Santa Claus. Even though you know Santa Claus doesn't exist, you kind of cling to that belief. I’m not saying that it’s a scam. They generally believe they can do it. The evidence is, however, that they can't.”

The acceptance of this revelation is not defeatist, quite the contrary. In fact, it is IFA’s view that this acceptance is the primary first step in healing for Madoff’s victims and for the majority of investors who have been led to believe that active managers add value, when for the most part, they detract. Every investor has the ability—nay, the right—to earn the returns of capitalism that are available to all market participants when they simply buy and hold a portfolio of index funds.

Individuals don’t like to think of themselves as average—especially the uber-successful clients of Madoff. However it all came together, they operated under the perception that they did not have to settle for the average expected returns of markets (about 10% on average since 1929)—and that was at the heart of their undoing. As is often stated by learned investors, average returns are superior returns.

IFA certainly hopes that the many people who have fallen prey to the allure of a con man’s false promises will learn from this disaster and move forward to learn the real source of stock market returns as well as the critical importance of disclosure, transparency and liquidity.

IFA also hopes that if Madoff does end up in the slammer, that unlike the Grinch, they do not give Madoff the privilege of carving the roast beast!

Happy Holidays from IFA!


Click to see the full IFA 2008-2009 Holiday Card