First reader-suggested story in a while and we love to publish those, so keep’em coming! Harry Markopolos (the Bernie Madoff whistle-blower we posted about on March of last year) is back at it with a quick and scathing article on Business Week. Many ways to look at it, but we would highlight three. The first one is very straight-forward: read it as a very useful “state of mind” for looking at any kind of out-performance. Of course Mr. Markopolos is talking about outright fraud, but we have to recall Taleb in Fooled by Randomness: the image of the “dart-throwing” monkeys who, given enough “throws”, can eventually show world-class investment track records out of nothing but chance. That said, we like that he doesn’t deny that genius exists, it’s just that he assumes fraud “until genius is proven” and advocates thorough investigation. Just the other day we posted Bob Rubin’s speech and the “focus on process, not outcomes” directive.
Another major point is to “be afraid, be very afraid” when the investment performance seems to ignore the underlying markets’ volatility – unless you’re a fixed-income fund not pricing-to-market and 100% of your holdings avoid default, the “45-degree angle” performance line set by Bernie Madoff is too good and NOT true. Even conservative, un-leveraged investors are bound to see ups and downs, however “dampened” they might be.
Finally, we’d highlight the “simplicity” criterion: “anyone who truly understands their craft should be able to explain their strategy in layman’s terms on a single sheet of paper”. Paraphrasing Pascal, Mark Twain or neither one, depending on who you believe said the original sentence, “I didn’t have skills/knowledge to write a short and simple investment case, so I’ve written a long/complicated one instead.”
Original quote: “I didn’t have time to write a short letter, so I’ve written a long one instead.”