A Story as Old as Time
There is a story as old as time – it’s the story of scammers and fraud. Look back through history and you find that the earliest recorded case of fraud was in 300 B.C.
Every now and then we have a big one. Enron, Bernie Madoff, Theranos, and now FTX.
Ultimately they are all one and the same. These things happen because we humans are such flawed beasts. We fall for the same tricks over and over. The fear of other people getting rich, and us missing out, will live on in us forever.
It’s easy to assume that wealthy people or successful businessmen and women don’t suffer from the same human emotions – surely they aren’t irrational and emotional and prone to FOMO?
The shareholder register of FTX certainly read like a who’s who of the investment world.
According to a New York Times article FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.
And the list of famous people who rubbed shoulders with the disgraced Founder, Sam Bankman-Fried (SBF) or invested in his company include Bill Clinton, Tony Blair, Tom Brady, Gisele Bundchen, Orlando Bloom, Katy Perry…the list goes on.
FTX was involved in a complicated and opaque technology. It lured people in because each investor thought, well WE don’t really understand it, but surely all those other smart investors do? WE don’t really know what due diligence to do, but SURELY everyone else does?
One investor looked at someone else, and they looked at someone else. So it goes on, until you find that not one person looked under the hood.
And now we see that it was all so glaringly obvious – even just the tiniest peek under the hood would have set alarm bells ringing.
SBF was 29 years old, he had no board (this is a HUGE red flag), control was in the hands of a few people who all lived together and seemingly had non-platonic relationships, he had no systems, no record-keeping, his hedge fund promised 15% returns in ‘any regime’ with no risk (modern day alchemy), he played video games in pitch meetings.
The newly appointed CEO John Ray (who also served as the CEO of Enron during its bankruptcy) said:
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.
The Debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise. For example, employees of the FTX Group submitted payment requests through an on-line ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.”
SBF was idolized. He graced the cover of Fortune magazine with the title ‘The Next Warren Buffett’, he named arenas (at a cost of over $150m), bought the naming rights to a sports team (at a cost of $210m) and placed the most expensive ad of all time ($6.5 million for a 30-second ad at the Super Bowl).
There’s an old adage that history doesn’t repeat itself but it does rhyme. The Super Bowl ad was a major warning sign when you look back at the fate of other companies that have taken that same slot.
In 2000, the year of the great internet bubble, companies with ‘dot.com’ in their name were afforded ludicrously high valuations despite no earnings and often no plausible business model. That years’ Super Bowl took place on January 30th 2000 and 14 dot.com companies paid astronomical percentages of their rapidly dwindling cash to buy ads for that match. Several of those companies went bust that same year (Pets.com being the most famous), and only two exist today. Almost to the day the Super Bowl ads marked the bursting of the internet bubble.
Fast forward twenty-odd years and it’s perhaps not surprising that the ‘Crypto Bowl’ of 2022 marked the death of the crypto fad.
I go back to the question though, how on earth did it happen? Like really, how did so many people get duped by a 29-year old who promised to change the world with his flavour of altruism but had absolutely no idea what he was doing? Why did so many professional investors rely on everyone else and every single one fail to do even basic due diligence?
The only place we can lay the blame for this huge failure is human nature. In the same way that people wanted to believe Bernie Madoff’s impossible returns or Elizabeth Holmes’ magical blood test, people wanted so desperately to believe that SBF was a genius – they wanted to believe that you really could make gold from lead. But most of all they all got lazy, complacent and the fear of missing out took over rational thought and process. FOMO is a powerful powerful force. No one is immune.
There is always something to learn and always a reminder we can give ourselves.
We long-term patient investors have a mantra: never own enough of any one thing to make a killing in it, nor too much of one thing to be killed by it (can’t-make-a-killing-can’t-get-killed). This is the only way we can protect ourselves from FOMO. We always understand the difference between investing and speculating (many a fortune has been lost by people who did not know the difference). And finally, we are never in a hurry – we are never in a hurry to get rich.
Perhaps the most dangerous quality an investor can have is to be in a hurry.
Whilst we watch fortunes vanish around us we plod on, compounding over the long run at around 10% per annum. We invest in diversified ETFs because, as Ben Carlson point out, you can’t get caught up in a Ponzi scheme that way. We sleep at night because we know that our losses are only ever temporary. That’s our superpower and we’re sticking to it.
“Sound investing can make you very rich if you are not in too big a hurry”
Georgie
georgie@libertywealth.ky