Errors of judgement can have dire consequences.
As reported in the Straits Times on 29 March 2017:
‘A partner at New York hedge fund Paulson & Co died on Monday (March 27) after jumping out of a hotel window in what may be the fourth person connected to US fraudster Bernie Madoff case to commit suicide, US media reported.
‘Before coming to Paulson, Murphy worked for hedge fund Fairfield Greenwich Group, which collapsed after putting more than US$7 billion with Madoff, who admitted in 2008 that he was running a Ponzi scheme.
‘A French aristocrat who lost US$1.5 billion in Madoff’s scheme previously committed suicide in 2008. Another investor, a 65-year-old former Army major, committed suicide a year later.’
Why did seemingly smart and wealthy people invest in Madoff’s Ponzi scheme?
Was it the promise of higher returns? Was it Madoff’s long-term track record of (apparent) consistent performance? Were they influenced by Madoff’s prominence as NASDAQ Chairman?
Whatever the reason/s, the choice they made led to a tragic outcome.
And there are many other Madoff victims — because of one decision — who have had to find a way to cope with the psychological impact of losing their life savings.
New York magazine interviewed an investor, Maureen Ebel, who lost US$7.3 million with Madoff…
‘…there is a middle population—[Maureen] Ebel and thousands like her—who led quiet lives building savings only to watch it vanish. For these people, the Madoff fraud sent them into a spiral of downward mobility. They lost virtually all of their money, had to recalibrate their dreams, and suffered the public embarrassment of having fallen for one of history’s biggest frauds.’
Studies show the emotional response to a loss is up to three times greater than that of a gain.
It really hurts to lose money. Why?
Because in modern society, money is up there with oxygen. Status. Lifestyle. Dreams.
Without money, we have to recalibrate our thinking.
Unfortunately, for some people that’s proves to be far too difficult.
Feelings of hopelessness, depression and suicide are not isolated to victims of scams.
In 2015, the International Society of Psychiatry published ‘Economic recession and suicidal behaviour: Possible mechanisms and ameliorating factors’.
The findings of the research were (emphasis is mine)…
‘A major and often prolonged effect of recession is on unemployment and job insecurity. Other important effects include those exerted by financial loss, bankruptcy and home repossession. It is proposed these factors may lead directly or indirectly to mental health problems such as depression, anxiety and binge drinking and then to suicidal behaviour.’
Being caught on the wrong side of a severe economic downturn can have a devastating effect on people’s lives.
Job loss. Business closed. House foreclosed. Retirement capital mauled.
How you lose money — in a Ponzi scheme; a margin call; a property and/or share market collapse — is largely irrelevant.
If you end up a whole lot poorer for the exercise, that’s what plays havoc with your mental well-being.
And it can happen to anyone…
‘[James Packer] revealed how he fell into depression, became a recluse and put on weight following the collapse of his telco business One.Tel in 2001’
If only I’d done this or If only I’d listened to my inner voice or if only I’d never met that person.
All the ‘if only’s’ in the world won’t change the outcome.
The key is to be wise before, not after, the event.
I was reminded of the Madoff scam by this CNBC article on 15 August 2019…
Here’s and extract from the article (emphasis is mine)…
‘General Electric shares saw their biggest drop in more than a decade Thursday after Madoff whistleblower Harry Markopolos targeted the conglomerate in a new report, accusing it of issuing fraudulent financial statements to hide the extent of its problems.
‘A website has been set up to disseminate the report, www.GEfraud.com, where Markopolos calls it “a bigger fraud than Enron.” The financial investigator, who was probing GE for an unidentified hedge fund, writes that after more than a year of research he has discovered “an Enronesque business approach that has left GE on the verge of insolvency.”
‘“My team has spent the past 7 months analyzing GE’s accounting and we believe the $38 Billion in fraud we’ve come across is merely the tip of the iceberg,” Markopolos said in the 175-page report. Markopolos alleges that GE has a “long history” of accounting fraud, dating to as early as 1995, when it was run by Jack Welch.
‘“It’s going to make this company probably file for bankruptcy,” Markopolos told CNBC’s “Squawk on the Street.” “WorldCom and Enron lasted about four months. … We’ll see how GE does.”’
Naturally, GE has denied the claims.
For those not familiar with Enron, here’s a quick…
Trip back in time
Enron Corporation was a trader of energy.
Through the use of derivative contracts, Enron found a highly profitable niche acting as the middle-man between the producers and customers.
But ‘sticking to its knitting’ wasn’t enough for the overly-ambitious Enron…
‘…the company spiraled totally out of control. It threw money at endless businesses—weather derivatives, newsprint, energy barges off the Nigerian coast, power plants in India–many of which seem to have been financial fiascoes almost from the get-go. Except for things like gaming the California electricity shortage (and possibly contributing to it), Enron’s innovative activities don’t seem to have produced much in the way of real profits.’
The company’s aggressive acquisition strategy appeared to be working well.
Enron’s share price soared. Rising from US$20 in early 1998 to around US$90 in August 2000.
At its peak, Enron traded on a PE multiple of 70 and was valued around US$70 billion. Enron was the seventh largest publicly traded company in the US.
Remember, this was the dotcom era. A time when people didn’t really care too much about anything other than hype and momentum.
But you can’t fool all the people all the time.
In August 2001, Sherron Watkins (a Vice President of Enron Corporation at that time) alerted Ken Lay to accounting irregularities within the company.
Watkins warned Lay that Enron might ‘implode in a wave of accounting scandals’.
Lay ignored the warning.
More questions started to be asked about Enron’s rather creative accounting practices.
One discovery led to another.
Enron’s accounts — audited by top tier accounting firm Arthur Andersen — were found to be a complete work of fiction.
In December 2001 — 15 months after its peak — Enron filed for bankruptcy.
The company’s share price began a rapid descent to zero.
As reported in The New York Times on 22 November 2001…
‘…around the time Enron disclosed serious financial problems last month, the company froze the assets in the company’s 401 (k) [retirement] plan because of an administrative change.
‘For several weeks, as the stock lost much of its value, workers stood by helplessly as their retirement savings evaporated. They were not allowed to switch investments at all — even though the plan had far less risky choices.
‘The unfortunate timing caps a year of pain for Enron’s workers. At the end of last year, the 401(k) plan had $2.1 billion in assets. More than half was invested in Enron, an energy conglomerate. Since then, the stock has lost 94 percent of its value.’
The abrupt change in the personal fortunes of employees was devastating.
As reported by Newsweek:
‘We saw crying Enron employees whose jobs and life savings both vaporized when Enron melted down, taking their 401(k) accounts with it.’
Picking up the pieces from a serious financial loss is not easy.
For your health and wealth it’s best to avoid becoming a victim
In all these cases — Madoff, Enron, One Tel and possibly GE — there is one common element…deception by those in charge.
Which brings me to the greatest deceit in history…the one being perpetrated by central banks.
The financial system is one giant Ponzi scheme. It needs an ever-expanding debt base to keep the charade from being revealed.
Negative rates and QE are the tools being employed to create the deception of growth.
The artificial stimulus pushes up asset prices (creating the so-called wealth effect)—no different to Enron’s fake profits propelling the company’s share price higher.
According to John Hussman’s Margin-Adjusted PE chart (which has a 93% accuracy in predicting long-term US share market returns), the US share market is now the MOST EXPENSIVE in history…even more over-valued than the 1929 and dotcom peaks.
Source: Hussman Strategic Advisers
Investors who ignore this warning signal, do so at their own peril.
If ever there was a time to be wise before the event, it is now.
Think very carefully about how much you allocate to an asset class/s that (history tells us) could lose 50%, 60% or even 80% of its value.
When this massive bubble finally bursts, there is going to be two distinctive camps…winners and losers.
The decisions you make today are going to have a profound effect (positively or negatively) on your life.
Editor, The Rum Rebellion
PS: Is the Australian economy in danger of a Japanese-like economic winter? Download your free report.