Money Mantras….(6)

I always feel nice to share with you the ‘Money Mantras’ series, the insights and distilled wisdom of great masters and thinkers. I also have a request to make. Please make it a point to share your feedback, perspectives and criticism for the articles I write. Some of you do keep providing feedback and that motivates me to write further. I know that all of you are tight pressed for time, so please do write once in a while if not regularly. Also request you to refer this blog cum portal to your friends and colleagues. I’ve passion for spreading financial literacy and making as many people financially independent as possible. All my articles are written with this perspective in my mind and I rarely promote our services in these articles. So please do spread a word. Now let’s come to this edition of ‘Money Mantras’.

1) Only when you combine sound intellect with emotional discipline, you get rational behaviour. – Warren Buffett

2) Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. – Warren Buffett

3) You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I
won’t do a damn thing. – Warren Buffett

4) You only have to do a very few things right in your life so long as you don’t do too many things wrong.- Warren Buffett

5) To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate reward.- Sir John Templeton

6) Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.- Sir John Templeton

7) The economy depends about as much on economists as the weather does on weather forecasters. -Jean-Paul Kauffmann

When I was young I thought that money was the most important thing in life; now that I am old I know that it is.  -Oscar Wilde

9) October:  This is one of the peculiarly dangerous months to speculate in stocks in.  The others are July, January, September, April, November, May, March, June, December, August and February. -Mark Twain

10) It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy. -George Horace Lorimer

The Mother of All Frauds

In my recent article, I’ve mentioned about how a U.S. Fund Manager killed himself due to the Bernie Madoff scam. The more I read about the scam, I’m convinced it is the mother of all frauds due to sheer size of the money cheated. The amount involved, USD 50 Billion is larger than individual GDPs of 110 of the 190 or so countries in the world. The person who cheated was a guy with immense reputation in wall street and was also a former chairman of NASDAQ Stock Exchange. I’ve read an article written by Dhirendra Kumar in this regard and thought of sharing the same with you. He also asks people maintain a healthy distrust for Financial intermediaries.

 

Before going to that, I’ve told you in previous instances that I wanted to write about how expensive your life insurance products are, how much commission and other benefits the agent is making and so on. Last month I wrote an article kept it in draft for few days and deleted it. Because I’ve included not only the exploitation on Insurance but even on other products like Mutual Funds etc. by certain unscrupulous distributors. Being an ‘insider’, I’m aware of all the malpractices many advisors adopt for making quick bucks. I thought that since we are honest and our clients are getting right advice through us, what is the need to expose those unfair practices, end up as a whistle blower and earn the ill will of some people in the community. Three things made me to change my mind.

 

1) My Primary objective is to create Financial Literacy and help people in becoming Financially Independent – so writing such an article would be an eye opener and as and when they deal with any financial intermediary, it would help them to be vigilant.

 

2) I’m in the course of reading the first ever authorized Biography of Warren Buffett published recently. In that I read that in 1999, he was invited to Sun Valley to meet and make a presentation to the top Honchos, Investment Bankers & Managers who manages trillions of dollars and drives the global economy and also the Czars of Technology Era.  In short, he was asked address the few people who decide the fates of billions of people. During that time, he was hugely criticized by Investment community and Media for missing the Technology & Dotcom Boom. In his speech, he very analytically and logically makes a presentation as to how they have all got the picture wrong and how things would burst sooner or later (which we all witnessed in 2000). The investment community & Tech Czars who were heavily betting on technology boom (and many of them subsequently went bust in 2000) gave a standing ovation once he completed his speech, though every word in the presentation was against them. When asked how this was made possible, Buffett replied “Praise by name, criticize by Category”.

 

3) Some time ago, I wrote an article on ‘Perils of trading in the Stock Market’. To my surprise, some of my friends and students who are in the business of trading and who makes a living by making others trade, appreciated my article through mail, phone and also in person. Based on the above, I realised that people do not get offended if you lay bare facts (not accusations) and as far as possible, don’t personalize the criticism.

 

So I’ll write an article about certain unfair practices in the financial services industry some time next month.

 

Now let’s listen to Dhirendra Kumar

 

“Last week, there was this news that an investment manager in the US had, over time, made off with about 50 billion dollars belonging to his clients. The man had been running a sort of a pyramid scheme where he was paying off older clients with newer ones’ money. This enabled him to pretend to generate an excellent, steady return which was what kept attracting investors. Fifty billion dollars is a great deal of money. This swindle, if it really did involve such a sum, is very likely the biggest financial scam ever. In rupees, this is Rs 250,000 crore, which is about five per cent of India’s GDP. To put this in perspective, this sum is larger than the individual GDPs of 110 of the 190 or so countries in the world.

 

I may be wrong, but outside the US, this event has not produced a reaction on the scale that it should have. Perhaps the rest of the world has reached some sort of a fatigued state as far as reacting to financial bad news from America is concerned. News of some problem regarding a few tens billions of dollars in the US is decidedly ho-hum stuff, hardly worth the paper it is printed upon–we’re into trillions now. In terms of regulation, the United States is now officially the financial banana republic of the world, a country where apparently, anyone can steal anything from anyone. Not that Bernie Madoff was just anyone. He was a pillar of society, a member of the best clubs, former chairman of the NASDAQ stock exchange and so on.

 

Clearly, the rest of the world now thinks of a 50-billion dollar swindle in the United States in the same way as it does of massacres and mass starvation in the Congo or Rwanda or some such place. You cluck your tongue and say how terrible, but then what can you do, that’s the way things are in those parts of the world.

 

Interestingly, I’ve recently noticed some decidedly self-flagellatory articles on this subject in the US media. Just yesterday, the New York Times had this piece about why Indian banks didn’t face the kind of bubble-related problems that US ones did. The article concludes that it was the Reserve Bank’s-specifically former Governor YV Reddy’s-iron hand that held back India’s banks from rushing headlong into the kind of mess that banks elsewhere in the world find themselves in. There’s nothing remarkable about this conclusion, it’s one of those things that a lot of people in India have now realised. What is more remarkable is that an article in a major American publication saying, “The next time we’re moving into bubble territory, perhaps we can take a page from Mr. Reddy’s book.”

 

However, none of this means that financial scams are not possible in India, or that even that a Madoff-style swindle cannot take place. The remarkable fact about the Madoff affair is how simple it was. Financial regulators around the world are more focussed on sophisticated fraud. A stock broker who pockets clients’ money and simply starts printing out fake account statements in order to use the money ‘temporarily’ is much harder to guard against. Given trusting clients and rising markets, this sort of a thing is not difficult to get away with.

 

As an individual, the best way to guard against this kind of fraud is to approach all financial intermediaries with a healthy distrust and make sure that you have third-party proof of all transactions.”

 

An U.S. Fund Manager kills himself

You might all have recently read about how a popular wall street guy named Bernard Madoff has cheated many banks, financial institutions, private funds, HNI (High Net worth Individuals) of his own Jewish community to the tune USD 50 Billion by operating a novel scheme which is nothing but a camouflaged Ponzi scheme. We Indians are not new to Ponzi schemes and the latest one being the ‘Gold Quest Scheme’. Whenever some one asks you to invest X amount of money and bring in 5 or more individuals under you who would also invest X amount of money and would each again bring 5 individuals with similar sums of money and as you go more on top of the Pyramid you would get BNW, Australian Vacation, Lakhs of money every month….. be sure it is nothing but the Ponzi scheme. If my memory of Financial History is right, such kind of schemes are called Ponzi schemes, because this novel way of robbing money from the masses and making few people rich was invented by a trickster named Ponzi in the earlier part of last century.

There have been thousands of Ponzi schemes after that, across the world, but again and again people get lured to this chance of easy money and keep loosing money every time. Many (not all)  MLM ( Multi Level Marketing) schemes are also nothing but Ponzi schemes in disguise. They conduct presentations at star hotels, bring in neatly dressed few who explain how they are able to make tons of money which would last for generations in a matter of few months / 1 or 2 years and how you could also do the same. They appeal to the greed which is dormant in all of us and I’ve seen many of my own friends and relatives, despite my advice, who are otherwise intelligent, falling prey to such foolishness.

People who have lost money in Ponzi schemes can take comfort from the latest Bernard Madoff ( Mad Off -Opt name for people who are mad off easy / fast money) scam that many banks and financial institutions run by MBAs graduated from Ivy League are also as foolish as you are. As Warren Buffett says, intelligent investing does not require great IQ (Intelligent Quotient) but EQ (Emotional Quotient) of keeping Greed and Fear under control.

Coming to the subject matter of this article, a private fund manager who has last $ 1 Billion of his clients’ money to Bernard Madoff has committed suicide. Please read below for the complete details.

 A fund manager who lost more than $1 billion of his clients’ money to Bernard Madoff was discovered dead Tuesday after committing suicide at his Manhattan office, marking a grim turn in a scandal that has left investors around the world in financial ruin.

 Rene-Thierry Magon de la Villehuchet was found sitting at his desk at about 8 a.m. with both wrists slashed, NYPD spokesman Paul Browne said. A box cutter was found on the floor along with a bottle of sleeping pills on his desk. Police did not find a suicide note.

 De la Villehuchet was one of several money managers and investors left reeling in the wake of Madoff’s alleged $50 billion Ponzi scheme, and his suicide demonstrates how the repercussions of this gigantic scam are intensifying by the day.

 De la Villehuchet, 65, was a distinguished financier who came from a long line of aristocratic Frenchmen, and he tapped his connections in the world of European high society to attract clients to his firm, Access International Advisors. It was not immediately clear how he knew Madoff or who his clients were.

 He grew increasingly subdued after the Madoff scandal broke, arousing suspicion among janitors in his Madison Avenue office tower Monday night when he demanded that they be out of there by 7 p.m. Less than 13 hours later, a security guard checked on him in his 22nd-story office suite. But de la Villehuchet was dead — a trash can placed near his body to apparently catch the blood, Browne said.

His death came as swindled investors began looking for ways to recoup their losses. Funds that lost big to Madoff are also coming up against investor lawsuits and backlash for failing to properly vet Madoff and overlooking some red flags that could have steered them away. It’s not immediately known what kind of scrutiny de la Villehuchet was facing over his losses.

De la Villehuchet (pronounced veel-ou-SHAY) comes from rich French lineage, with the Magon part of his name referring to one of France’s most powerful families. The Magon name is even listed on the Arc de Triomphe in Paris, a world-famous monument that was commissioned by Napoleon in 1806.

“He’s irreproachable,” said Bill Rapavy, who was Access International’s chief operating officer before founding his own firm in 2007.

The Frenchman’s firm enlisted intermediaries with links to upper-crust Europeans to garner investors. Among them was Philippe Junot, a French businessman and friend who is the former husband of Princess Caroline of Monaco, and Prince Michel of Yugoslavia.

De la Villehuchet, the former chairman and CEO of Credit Lyonnais Securities USA, was also known as a keen sailor who regularly participated in regattas and was a member of the New York Yacht Club.

He lived in an affluent suburb in Westchester County with his wife, Claudine. They have no children. There was no answer Tuesday at the family’s two-story house. Phone calls to the home and de la Villehuchet’s office went unanswered.

Guy Gurney, a British photographer living in Connecticut, was friends with de la Villehuchet. The two often sailed together and competed in a regatta in France in November.

“He was a very honorable man,” Gurney said. “He was extraordinarily generous. He was an aristocrat but not a snob. He was a real person. When he was sailing, he was one of the boys.”

The two were supposed to have dinner last Friday but Gurney called the day before to cancel because of the weather. But during the call, de la Villehuchet revealed he had been ensnared in the Madoff deceit.

“He sounded very subdued,” Gurney said.

Gurney said de la Villehuchet was happily married to his wife.

“I can’t imagine what it’s like for her now,” he said.

(with inputs from Yahoo)