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Old 12-26-2008, 11:39 AM   #21
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An attempt to avoid all the world's Bernie Madoffs would have also passed over that cocky, uncommunicative young whippersnapper Buffett:
Lessons From Madoff: You Would Have Missed Buffett Too - Seeking Alpha
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Old 12-26-2008, 12:33 PM   #22
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An attempt to avoid all the world's Bernie Madoffs would have also passed over that cocky, uncommunicative young whippersnapper Buffett:
Lessons From Madoff: You Would Have Missed Buffett Too - Seeking Alpha
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Of course, I would have missed out on becoming wealthy alongside Buffett Ė successful Ponzi scheme or not. It seems you are damned if you do and damned if you donít when it comes to picking advisors. You can never tell beforehand. Iím happy to do it myself.
The bottom line is that "getting rich quick" (or moderately quick as Buffett did for his investors) takes a LOT of risk. That why he was able to generate something like 22% returns for the better part of two decades. No "safe" or mainstream investment can provide that without taking a LOT of risk -- in this case, the risk of faith.

Just as some speculative stocks go bad and some become ten-baggers, some of these people (Madoff) are scam artists, some mean well but fail, and some (Buffett) mean well and actually deliver. But it takes a huge leap of faith for an informed investor to have that trust.
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Old 12-27-2008, 08:56 AM   #23
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But no one is required to diversify.
Actually, most institutional investors ARE required to. Many of them seem to have forgotten that in this case.
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Old 12-27-2008, 03:06 PM   #24
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The bottom line is that "getting rich quick" (or moderately quick as Buffett did for his investors) takes a LOT of risk. That why he was able to generate something like 22% returns for the better part of two decades. No "safe" or mainstream investment can provide that without taking a LOT of risk -- in this case, the risk of faith.
You're going to have to clarify this concept of "faith risk" with Buffett's hare-brained scheme of "buying assets below book value". I think that by the time he was in his 20s he knew what he was able to do, and it wasn't as much risk as it was systematic slogging. What about the years of Graham's students front-running his classroom stock studies? Buffett's disillusionment with brokerages? Remember his cocoa commodity redemptions? GEICO, from his article "The Stock I Like The Best"? The map company selling at a fraction of the value of its investment portfolio? Learning how to value brands & franchises and use insurance float?

I think Buffett worked his assets off to deliver his returns. It also helped that he was willing to do the scut work & rock-flipping for his own equity stake while others favored selling large-cap blue chips at big commissions or 8.5% front loads. Not sure how much effort was apparent with the others, let alone Madoff. It also doesn't seem possible to create the same record today-- despite the efforts of Leucadia, Merkel, & Lampert. Lord knows I'd put some money with "Son of Berkshire Hathaway" if it existed.

I think Buffett enjoyed turkey-shooting economic conditions in the 1950s & '60s that would be next to impossible to find today, outside of Romania/Croatia or Iraq or North Korea. I think today that he is indeed taking larger risks, although I suspect that he passes up a dozen "opportunities" for every reinsurance contract or derivative he sells. Even then, though, I think that people focus too much on the black swans and not enough on the pedestrian dividend-payers & consumer durables.

That Economist article on rumors of Madoff's alleged insider trading makes perfect sense-- no wonder people were willing to hand over their money and keep their questions to themselves.
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Old 12-27-2008, 03:12 PM   #25
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You're going to have to clarify this concept of "faith risk" with Buffett's hare-brained scheme of "buying assets below book value". I think that by the time he was in his 20s he knew what he was able to do, and it wasn't as much risk as it was systematic slogging.
What it means that a lot of people who invested money with Buffett in the early years probably had no way to *know* that he would deliver for them, or even that he'd be honest and diligent with the funds of his clients.

That's the "faith risk" -- the risk is that you are putting your faith in someone who was unproven and didn't have trransparency in his operations so you couldn't really verify what your money was doing like you could in (say) a Vanguard mutual fund. This is before Buffett was Buffett and before he earned the reputation he has today.
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Old 12-27-2008, 03:24 PM   #26
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The brother of the French investor who was found dead in his office last week said this in today's paper:

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Contrary to what some analysts say now, Bertrand (the brother) said the returns on his investment with Madoff were not too good to be true.

"Over four years my gain was 17 percent, that's not crazy," he said.
So apparently not every Madoff investor received excessive gains that might have triggered suspicions.

from AP Interview: French investor lost his fortune, friends' and relatives' funds in Madoff scam -- chicagotribune.com
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Old 12-28-2008, 01:27 AM   #27
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Madoff's returns were not remarkable for being high, just for being unnaturally consistent year to year despite market conditions. The tendency to do return smoothing is actually extremely common; many publicly traded companies use a variety of barely legal tricks to make their returns look stable year to year, even at the expense of total return.
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Old 12-28-2008, 10:51 AM   #28
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What it means that a lot of people who invested money with Buffett in the early years probably had no way to *know* that he would deliver for them, or even that he'd be honest and diligent with the funds of his clients.
That's the "faith risk" -- the risk is that you are putting your faith in someone who was unproven and didn't have trransparency in his operations so you couldn't really verify what your money was doing like you could in (say) a Vanguard mutual fund. This is before Buffett was Buffett and before he earned the reputation he has today.
Agree.

From Lowenstein's & Schroeder's biographies, when Buffett was in his 20s it sounds like he was quite the evangelical stock promoter. I wonder how many people gave him money just to be able to enjoy the show... or just to make him go away. And I wonder if we'll ever again read about an office like Graham & Tweedy, Browne's 1950s all-star lineup.
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Old 12-28-2008, 06:25 PM   #29
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People, you are missing the elephant in the room. What made Madoff so unique (in a bad way) was that he was self clearing! The guy had his own broker dealer, settled his own trades, printed his own statements, etc. That is what made this whole affair possible.

Most hedge funds trade through a prime broker and use a third party custodian )who is on the hook) to watch the money, clear the trades, invest the sweep, etc. If I run a hedge fund and my prime broker is JP Morgan, Goldman, Merrill, Pershing, etc they may not be perfect, but they wouldn't allow what has happened with Madoff.
Bingo. Our local small cheese felon, Al Parrish, did exactly the same thing, on a way tinier scale. Although some of his funds were at Schwab, and they are eating it big-time with the lawyers as a result of not requiring back up to his fabricated statements. You gotta have a real custodian and a real auditor or the likelihood for fraud is practically guaranteed.
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