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Why the Next Bernie Madoff Will Be Impossible to Spot — Transcript

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0:00broadcasting from Baltimore Maryland's
0:03and all around the world you're
0:05listening to the Stansberry investor
0:07hour
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0:18investor our calm here is your host dan
0:21ferris hello and welcome everyone to
0:24another episode of the Stansberry
0:25investor hour I am your host dan ferris
0:29and the editor of extreme value which is
0:31a value investing service published by
0:34Stansbury research all right we have a
0:36really good show lined up with a great
0:38guest for you today so let's get into it
0:42okay
0:43today's rant is actually going to be a
0:45little shorter than normal however I
0:48have a special two-for-one deal you're
0:51gonna get a second rant of short when
0:54also later in the program around the
0:57time when I do the mailbag
0:59so the first rant I'm gonna call
1:02prioritizing people and philosophy yes
1:05it sounds very highbrow but it's not I
1:07promise so a couple of weeks ago on
1:11episode 88 of the podcast we interviewed
1:15grant Williams from real vision TV and
1:18you know from just hanging around the
1:20financial markets for decades and and
1:22doing lots of cool stuff too and we got
1:26a lot of great feedback about that
1:28episode if you haven't listened to it
1:29definitely tune in Grant has interviewed
1:33people who like like Anthony Eden who
1:35never deep never did an interview before
1:39that and you know I'd love to have him
1:41on the show but it wouldn't surprise me
1:42if he never did one after it so during
1:46that discussion with Grant Williams I
1:47was reminded of a Twitter post whose
1:50author unfortunately I've not been able
1:52to track down so for now I'm sorry it's
1:55still anonymous but when I find out who
1:57it is I'm going to credit them and the
1:59Twitter post was brilliant I thought and
2:01I've thought about it and thought about
2:03it and and I'm gonna talk about it as
2:06often as I think is necessary including
2:08right now so the Twitter poster said
2:11when people are evaluating a fund or a
2:15manager you know an investment manager
2:19or or a mutual fund or hedge fund or
2:22something or
2:22even a public company that they're
2:24thinking about buying for their
2:25portfolio they tend to prioritize in
2:29this order they'll prioritize
2:32performance usually recent performance
2:34then the strategy used to get that
2:37performance then the philosophy behind
2:39the strategy and only then do they start
2:42wondering about the people behind the
2:45philosophy of the strategy deployments
2:46and and the Twitter post burned itself
2:51in my brain because the person said you
2:54know something it's exactly the opposite
2:56in real life of what you should do what
2:58you should do is first get to know the
3:01people then get you know the people
3:03allocating your capital in whatever form
3:06get to know the people get to know their
3:09philosophy of life really and investing
3:12to then get to know the strategy they're
3:15using that that you're proposing to put
3:17money into with them and then evaluate
3:20whatever performance information they
3:23can give you and I mentioned a moment
3:27ago
3:27Anthony deed innovative vice Holdings
3:29who grant Williams discussed a couple
3:32podcasts ago and if you go to a device
3:36Holdings website you will find
3:38information about the philosophy and to
3:43an extent also the strategy and a little
3:46bit about the performance and less about
3:49the people because you know there's some
3:51information about the people there is
3:53some information but you know Beadon is
3:55a very humble kind of a guy and I think
3:58that's a decent example of just a place
4:01to go that where these things are
4:04prioritized just about right so that's
4:07that's that's the rant that's that's
4:09really the core of it and I don't want
4:11to go on too long about this because it
4:13might dilute the message when you're
4:16looking to put your money with someone
4:18or by someone's research or really the
4:21and the most important thing is when
4:23you're looking at someone to allocate
4:25your capital whether it's hedge fund guy
4:28or even you know if you've got some
4:30program with a broker who's gonna
4:32allocate your capital or or any anything
4:36like that a public company you know you
4:38put your money in Berkshire Hathaway you
4:39want to know something about Warren
4:41Buffett right any any of these cases
4:43anybody's gonna allocate your capital
4:46get to know the person forget about
4:48their recent performance prioritize that
4:51last pie or ties finding who the heck is
4:55this person first and if you read my
4:58newsletter extreme value this idea has
5:01kind of gotten into my head and won't go
5:03away so you know the first thing I tend
5:06to talk about when we wrote about well I
5:09don't like to give away picks because
5:10people pay a lot of money for the
5:12newsletter but we the the companies that
5:14we've written about recently I've tried
5:16very hard to dig into the person's past
5:19the the main capital allocators past and
5:22and learn something and share something
5:25important about the person what did they
5:28do before they were aliquat how did they
5:30grow up what did they do before they
5:33were allocating capital what did they
5:34where'd they go to school how'd they get
5:36it you know the idea to be in this
5:38particular business etc etc and then of
5:42course then after you know that stuff
5:44then think about their philosophy of
5:47investing not what they're doing with
5:50your money but why they're doing it
5:53there is a guy there's a guy on YouTube
5:58his name is simon Sinek SI n EK and he's
6:02got a great presentation and if you just
6:05go on youtube and type simon Sinek this
6:07is the presentation that comes up first
6:09I don't know what it's called but it
6:10doesn't matter you'll find it if you
6:12just type his name on YouTube and he's
6:16got this great presentation that speaks
6:19to the prioritization of philosophy over
6:22these other things and he talks about
6:27marketing you know and he says most
6:29people say you know we have this product
6:32it's really great you know why don't you
6:35buy it
6:37and Simon Says no no no no no no no
6:39that's not how really great products and
6:43companies operate and he uses the the
6:46example of Apple and how they before you
6:50know the product they always seem to
6:53want to tell you why why they're doing
6:56what they do and again once you know why
6:59which is kind of a philosophical
7:01question it tells you more about the
7:04people tells you more about who you're
7:06dealing with and of course with Apple
7:08you know they had this this legendary
7:10guy you know Steve Jobs and who founded
7:13the company and and gave birth to the
7:16philosophy of insanely great products
7:18and insanely great customer experience
7:20etc okay so then after you know about
7:25the people and the philosophy then what
7:26do you do well then you want to know
7:27about the strategy so if you've learned
7:30enough about me and and my philosophy of
7:33investing then you say well what is this
7:35newsletter Dan writes you know it's
7:37extreme value its value investing and
7:39you say whoa value investing hasn't done
7:40so well over the last several years
7:42yeah but Dan's done okay right so that's
7:45strategy and performance you're kind of
7:48you're you're actually D prioritizing
7:51strategy and performance compared to
7:52people and philosophy and do this when
7:55you look at every public company that
7:57you might choose to invest in or any
8:00situation where you're putting capital
8:02to work with somebody else in charge I'm
8:05gonna leave it there okay shorter than
8:08normal ramp I'm gonna leave it there
8:10prioritize people then philosophy then
8:13strategy then performance and I think
8:17you'll make a lot better investing
8:20decisions and that after all is our
8:21mission we're trying to help you become
8:23better investors you all right that is
8:27this week's rant right into feedback at
8:30investor our comm tell us what you think
8:35let's get on with some some news items
8:38right now just a few and it's an
8:42interesting thing we we actually my our
8:45producer Justin gave me these news items
8:47this week as he does most weeks and I
8:50looked through them and I prioritized
8:51and I thought you know something there's
8:53news about the beginning of corporate
8:55life and there's news about the creative
8:58destruction and political events ending
9:01some corporate lives and the the
9:04beginning of corporate life for Levi's
9:09as a public company is is coming up
9:13Levi's the jeans people you know the
9:16clothing company has filed the initial
9:18paperwork for an initial public offering
9:21for the second time they were public and
9:24they went private back in 1985 and
9:26they're planning to use the money from
9:28the IPO to seize opportunities where
9:32where else in emerging markets like
9:34Brazil and China and they think they're
9:38gonna raise between 600 and 800 million
9:40with the entire company valued at around
9:42five billion and I'll be real curious to
9:45get a look at the financials of of
9:47Levi's because you know you wonder how
9:51we're living in a time of creative
9:54destruction of a lot of retailers and
9:56even some brands and things and it's a
9:58difficult time and I'm curious to know
10:00how they've done the last several years
10:02and and what it looks like from the
10:05inside out
10:07and of course I said you know some of
10:10the news is also about the end of the
10:12corporate lifecycle and then yet another
10:15retailer has bitten the dust palest
10:19shoes files for bankruptcy for the
10:22second time in two years I think they
10:25call that chapter 22 right there second
10:27chapter 11 and they're closing all 2100
10:34payless shoes doors
10:36so no more paler shoes and you know when
10:41you when you look at it I mean I have a
10:43list here of all these retailers who
10:47filed over the past few years David's
10:51Bridal performance bicycle Sears
10:53Mattress Firm samuels jewelers national
10:56stores Brookstone heritage home group
11:00Rockport I have Rockport's on my feet
11:03right now Nine West Clare stores bond on
11:06Charming Charlie Toys R Us arrow Souls
11:09perfume mania True Religion Gymboree
11:11route 21 paints palest the first time
11:14around Gordon ins Gander Mountain age H
11:16Gregg RadioShack etc etc etc American
11:19Apparel was just endless endless
11:21destruction in the retail sector so it's
11:25really hard to pick a retailer to buy
11:26these days and and I'm trying to avoid
11:30doing so this investor also in the
11:35general category of stuff related to you
11:38know the end of corporate life now Honda
11:43the you know Honda Motors is not coming
11:46to the end of its life however their one
11:49and only plant in the United Kingdom
11:52will come to the end of its life in 2021
11:55and of course as soon as I say this
11:59what's the first thought on your mind
12:01well brexit right now ponder says it has
12:04nothing to do with brexit I just find
12:07that a little bit difficult to believe
12:09now look if brexit happens which i think
12:12it's less likely than any time since the
12:14vote to leave the European Union
12:18happened a couple years ago
12:21I think it you know just far less likely
12:23though then the news is kind of winding
12:26back around that way but if it does
12:29it'll be pretty bad for a lot of folks
12:32in the UK who depend on the that
12:34relationship with the continent with
12:36continental Europe and the rest of the
12:38EU they're going to going to lose thirty
12:41five hundred jobs at their one and only
12:43UK plant closing down in 2021 huh so
12:49beginning of you know there's there's
12:52IPO there's bankruptcy there's closing
12:55plans and the corporate life cycle goes
12:58on and on and on
13:00okay it's time to get to our guest Diana
13:02Henriques okay it's time for this week's
13:08guest and I really can't wait to get to
13:12this conversation because it ties right
13:14in with my opening rant for this episode
13:17and you'll see what I mean so our guest
13:20is Diana Henriques Diana be Henriques is
13:24an award-winning financial journalist
13:27associated with the New York Times for
13:29more than 25 years and she's the author
13:32of a first-class catastrophe the road to
13:36Black Monday the worst day in Wall
13:37Street history released in September
13:402017 she's also the author of The Wizard
13:44of lies Bernie Madoff and the death of
13:46trust a New York Times bestseller and
13:49she's written three other books on
13:51business history over her intrepid
13:54career as an investigative journalist
13:56miss Enriquez has covered and uncovered
13:59some of the greatest scandals of us
14:01financial history starting with the
14:04Abscam political corruption probe of the
14:061970s and continuing through the Enron
14:09bankruptcy in 2002 in 2005 she would say
14:14Pulitzer finalist for a series of
14:17articles exposing the financial
14:19exploitation of young soldiers by
14:21insurance and investment companies work
14:24that also won her a George Polk award
14:26and Harvard's gold Smith Prize for
14:29Investigative Reporting Wow
14:31she became a Pulitzer finalist again
14:34as a member of the new york times team
14:36covering the US financial crisis of 2008
14:40Wow Wow double Wow
14:42please welcome diana Henriques welcome
14:45diana thank you so much and thank you
14:47for that very kind introduction it it
14:49pays to have very talented colleagues
14:51and I always have at the time I you know
14:54I I I don't know why I'm not more
14:57familiar with your work I can't wait to
14:58finish this book I've started the Wizard
15:01of lies and it's really good it reads
15:04almost like it's like a really detailed
15:07novel and it and it's it's very exciting
15:10stuff well I'm sure all of Madoff
15:12victims wish it had been fiction but
15:15unfortunately for them and really for
15:18all of us it's all too true because this
15:21is a problem of Ponzi schemes as you
15:25know and it's just it's stubbornly
15:27difficult to eradicate these crimes of
15:30trust as I call them and they they
15:34remain a perpetual risk for investors
15:38yeah it's really hard to figure this out
15:41where it gets going like you can't
15:43prevent these things you can discover
15:45them and prosecute them but you really
15:47can't prevent them can you
15:49it's challenging it now one of the more
15:55frustrating aspects of the Madoff case
15:58of course was that regulators did
16:02attempt to investigate him three times
16:05and botched every effort in some cases
16:10through lack of resources in some cases
16:12through lack of experience and in every
16:15case through a lack of imagination they
16:18just could not imagine that this admired
16:21trusted respected Wall Street figure
16:24could possibly be a crook but that's
16:27that's the insidious things about Ponzi
16:29schemes the only people who can run them
16:32are admired trusted respected figures
16:35you know something some shifty guy you
16:38know and a cheap suit is never gonna
16:39lure you into a scheme only an admirable
16:43trustworthy people can do that and
16:45that's what makes it so
16:47hard to prevent them I think there are
16:49some steps that there's some self-help
16:51steps that investors can do and I think
16:54there were some regulatory efforts that
16:56could have been made still could be made
16:59that would protect us to some degree but
17:02they are they are difficult crying yeah
17:04it's one of the points you made in your
17:07book was the sort of well you made it
17:13implicitly over and over again the
17:15reputation versus red flags there were
17:19all these red flags all the time and
17:20they came so close to catching him a
17:22couple of times in bulked because
17:25ultimately there would be some SEC
17:27report or something or in the FBI or
17:29someplace where they'd say well we just
17:31can't believe that a guy of his
17:33reputation would do this bla bla bla
17:35yeah and you know it's hard to say it's
17:39hard to fault people for trusting
17:42someone like Bernie Madoff I mean we
17:46scientists will tell you that human
17:49beings are kind of hardwired to trust
17:50each other and I can see from an
17:54evolutionary standpoint how that would
17:56have been really important when you're
17:57putting together you know the hunting
17:59team to go out out after the woolly
18:01mammoth it really helps if they trust
18:04each other to fairly share the kill but
18:10the fact that we our default position is
18:14to trust one another especially people
18:16who look and sound a lot like ourselves
18:19that leaves us potentially vulnerable to
18:23the the sociopaths who will use that
18:26trust to rip us off it it's always a
18:30risk but you know the the alternative is
18:32not don't trust anybody
18:35that's what's so difficult we can't just
18:38say you know trust no one
18:39or modern commerce comes to a halt and
18:42modern banking comes to a halt and what
18:44a hideous society that would be to live
18:46in anyway so it's important that we
18:50figure out a way that we can sustain the
18:52trust that's necessary
18:54one of the ways that inductors can do
18:56that is is to simply ensure that the
19:01but managers they use the investment
19:03advisors they use maintain their account
19:07with an independent third-party
19:09custodian it's kind of a complicated
19:11measure but but an independent
19:14third-party custodian is almost in you
19:17know no fail insurance against a Ponzi
19:20scheme it's a good practice to just be
19:25sure as an individual you're doing that
19:27and then from the regulatory standpoint
19:30I frankly think regulators need to be a
19:33lot tougher on banks as our first line
19:37of defense against Ponzi schemes because
19:40as you could see from Wizard allied if
19:43bernie madoff hadn't had a bank account
19:45he would not have been able to do what
19:47he did every Ponzi schemer has to have a
19:49bank account and uses that bank account
19:52in in pursuit of his crime so Bank you
19:56know the banking business could be an
19:59early warning line of Defense's you were
20:02saying earlier to stock these crimes
20:05instead of do to pick up the pieces
20:07after they've they've been exposed well
20:10bankers are in a position to do that and
20:12you and I may not be so I would like to
20:15see a much more made of the bank
20:19regulatory process as a tool against
20:22Ponzi scheme yeah you know it's you
20:26raise an interesting point because at
20:29one point in the story at all these huge
20:33banks JPMorgan Chase HSBC Citibank
20:37Fortis Merrill Lynch they were actually
20:39offering Madoff linked derivatives
20:43derivatives linked to Bernie Madoff
20:45no phony performance so I don't know I
20:51don't know Diana should I really trust
20:52these people that's one of the reasons
20:56that some of those banks paid
21:02substantial civil penalties in the
21:04aftermath of the Madoff case but that
21:07demonstrates a little bit of what I was
21:10also getting at with my book on the 1987
21:13crash
21:14and that is how how financially
21:18complicated and interconnected our our
21:22financial lives are today I mean you may
21:25think that you're that you don't have
21:29anything to do with derivatives okay
21:30derivatives I don't invest in them I
21:33don't have anything to do with them and
21:34yet
21:35Madoff victims even though they were not
21:38investing in derivatives the creation of
21:41these Bank sponsored derivatives tied to
21:44Bernie Madoff helped pump more money
21:47into his scheme and help keep that
21:50scheme going longer so in effect they
21:53did have a stake in how derivatives work
21:56they just didn't know it so that the
21:59modern world makes it very difficult for
22:02you to understand what fault lines
22:05you're standing on if you know what I
22:07mean you you may think oh I don't have
22:09anything to do with that or I don't I'm
22:11avoiding those risks but if you're
22:13plugged into us an overall financial
22:16system that is vulnerable to those risks
22:19as we were in 1987 then you're gonna
22:24feel the impact of them even if you did
22:26not voluntarily take that risk on yeah
22:29you know that's a great point and it's
22:31I've only dipped into the book
22:33first-class catastrophe that you
22:35mentioned about the 87 crash but the
22:37point that I did glean from it is what
22:40you just said that was the first modern
22:42crash and I never looked at it this way
22:45before I read read a little bit of your
22:47book that was the first modern crash
22:49where where that's we learned about this
22:53thing that we've come to know very well
22:55called systemic risk and how it's all
22:58tied together and you light a match at
23:00one end and it explodes at the other and
23:02and that is now the world we live in
23:05every every event since then has been a
23:07it is now I mean as I say in the book it
23:10was unlike any previous crash and every
23:13subsequent crash has been like it was
23:16the first of the subsequent ones and
23:19what made it so unique in contrast to
23:23the previous ones was just as you said
23:25it wasn't a crash in one market
23:28it was a crash that affected every
23:31market every regulator you know even all
23:37around the world so this is a a novel
23:42experience for us to find that you know
23:45the storm didn't just hit in one little
23:48place I mean you may have a complete
23:50bust or we have a stock market crash or
23:52we have a real estate crash or or we
23:55have a banking crisis but in 87 we had
23:58all of those things they were all
24:00connected with one another real estate
24:02because bonds were being sold dine ance
24:04buy real estate mortgage-backed
24:05securities were a brand new thing so it
24:08opened the door to us but it actually
24:11showed us Dan really changes that had
24:14already occurred that we weren't aware
24:16of it wasn't like everything just
24:18happened overnight and then we had to
24:19crash these were changes that had been
24:21developing since the late 70s into the
24:25early nineties the advent of these
24:27gigantic pension funds as stock market
24:30investors the advent of derivatives that
24:32tied the cash market for stocks to the
24:35derivatives markets in Chicago the
24:37advent of automation which radically
24:40speeded up the pace at which trading
24:43could occur and the kind of trading that
24:46could occur I mean the granddaddy of all
24:47the algorithms we see in the stock
24:49market today arose in the very few years
24:52right before the 87 crash and you had
24:55this balkanize fragmented regulatory
24:58system where each regulator is kind of
25:00regulating his part of the elephant you
25:02know I regulate the knee you regulate
25:04the ear and nobody really had authority
25:07and disability for the market as a whole
25:10so we almost destroyed our financial
25:14system on Black Monday 87 but we haven't
25:17done a lot to fix those problems since
25:20then we've been kind of going on a wing
25:22and a prayer until 2008 which should
25:26have been a real serious wake-up call
25:29that we had to fix some of these
25:31problems
25:31some of them were addressed not all of
25:35them very well some of them still
25:37haven't been addressed which is why I
25:38still kind of bang on the table that we
25:41need to learn
25:42more from Black Monday than we have but
25:46Diana what what what could we possibly
25:48do this this financial system this
25:51global financial system that we live in
25:53that you point out is so interconnected
25:54through so many different instruments in
25:58so many trading venues do you really
26:03think it's possible I mean do you really
26:06think that the government of all people
26:08regulators could could really get their
26:10arms around it in a meaningful way well
26:13I think there's certainly some steps
26:15that could be done to make us less
26:18vulnerable I mean you know markets are
26:20going to fluctuate there's no doubt
26:21about that
26:22I'm not concerned in in the 87 book
26:25about whether the market Falls I'm
26:27concerned about whether it falls apart
26:29and markets that fall apart is what we
26:32need to guard against not just markets
26:34that go up and down in terms of prices
26:36one thing that we could do is have
26:38better international coordination and
26:42harmonization that would help and we've
26:44neglected that tremendously in recent
26:48years the second thing that we could do
26:50is have unified federal regulation
26:53instead of having it split among six
26:56different agencies and 50 state
26:58securities regulators insurance
27:00regulators and banking regulators unlike
27:03virtually every other economy in the
27:05world we have we do not have a unified
27:11financial regulator plus a central bank
27:14we have a central bank the Federal
27:15Reserve and then we've got this whole
27:17village of different regulators
27:19regulating their little piece of the
27:20market we can fix that through
27:22legislation you know that wasn't handed
27:24down on tablets of stone we can change
27:27that it would take a lot more bipartisan
27:31cooperation than would be we've been
27:33seeing lately and hopefully it won't
27:35take another desperate financial crisis
27:37to push us in that direction
27:39but that is something that would make
27:41our markets less vulnerable if you had
27:43centralized visibility and centralized
27:46authority to act regardless of which
27:48corner of the market the fire broke out
27:51in so that's another thing but that
27:54would help in the third thing that would
27:56would be a lot more visibility into the
28:01kind of financial engineering that
28:04increasingly drives our financial
28:07engines more visibility into the kinds
28:10of derivatives that are being developed
28:12the kinds of swaps the kinds of pain
28:16instruments that giant institutions are
28:19trading back and forth the kind of
28:21algorithms that they're using
28:23we need regulators who are you know
28:26equipped by their training to understand
28:28those factors and they need to have
28:30visibility into what's happening and
28:34again that doesn't take a constitutional
28:36amendment it just takes a change in how
28:38we regulate these increasingly
28:42increasingly interconnected and I think
28:44increasingly fragile market later Diane
28:48it sounds like you're saying that it
28:51sounds like you're saying if we you know
28:53if we only had more centralized federal
28:55national kind of regulation and and I'm
28:59having trouble calling to mind a country
29:03in which that exists that you know
29:06doesn't have a really kind of sclerotic
29:09the economy especially lately is there
29:14is there a plate is there a model for
29:16this in other words is there a model for
29:18this type of centralized regulation well
29:22the Japanese market has long had the
29:26Bank of Japan central bank and the
29:28financial ministry it has a central it's
29:31it regulates its markets through a
29:34centralized agency the UK has struggled
29:39it has the Chancellor of the Exchequer
29:41of course as its the Bank of England is
29:43its central bank rather and it has
29:46created and recreated a centralized
29:50enforcement agency over the years but it
29:56is typically not the model that you
29:59would have a one regulator for your
30:02derivatives markets two or three
30:04regulators for your banking system in
30:06addition to the Fed and a regulator for
30:08your
30:09stocks and options market that's
30:11different from the regulator for your
30:13commodities derivatives markets those
30:17that break down among all of that
30:20complex machinery very nearly was was
30:24fatal in 1987
30:26now one way it could be accomplished
30:28Britain's better coordination and that's
30:31what federal officials have relied on
30:34since 87 is trying to coordinate better
30:37among all of these moving parts but you
30:42know we've got a regulatory system
30:45designed for a different era Danny you
30:49know an era when markets were more
30:51discrete where commodities typically
30:54traded among themselves the people
30:55trading commodities were not trading
30:58stocks the people trading stocks
31:00generally were not trading real estate
31:02or or a bond but that's not true anymore
31:05and hasn't been true for decades we we
31:08have a unified marketplace as you know
31:10that was the primary finding of the
31:13Brady Commission Blue Ribbon report on
31:161987 crash report that was given to
31:19President Reagan and that is that we
31:21have a unified market but we're still
31:23regulating it as if it were a fragmented
31:27market we need to have a unified
31:29regulator for a unified market just to
31:32recognize reality you know if there's a
31:35way to achieve that through through
31:38better coordination and cooperation
31:40among individual regulators than great
31:43but then you should kind of relying on
31:45the personalities of the folks at the
31:48helm when the next crisis hits so I
31:51think we need to kind of think in some
31:54fresh ways about how we regulate the
31:56modern world you're the as you know 90%
32:00of the daily trading on any given day is
32:02done by algorithms they're not human
32:05decision-making the human
32:06decision-making which was was over when
32:09the software was written from then on
32:11it's a it's an automatic response to
32:14changes in market direction or market
32:16volume so if if we're gonna regulate a
32:20market that's but 90 percent autumn
32:23as if it were still the market of the
32:251950s where it was 100% human driven
32:30we're gonna get into trouble and I'm
32:32just trying to make people aware of that
32:36and get people thinking about ways that
32:38we can avoid the consequences of that
32:41okay Diana I'm gonna talk about three
32:43little episodes that were in the HBO
32:47film of your book Wizard of Lies
32:49starring Robert De Niro and Michelle
32:52Pfeiffer which I kind of enjoyed
32:54watching recently create that was great
32:56fun for me to edit like yeah I noticed
32:58you got to do scenes with Robert De Niro
33:00that must have been a lot of fun yeah
33:02you know I thought I would just retire
33:04at the top finish back but I make my
33:09film debut of opposite Robert De Niro
33:11and you just doesn't get any better than
33:13that
33:13so anyway there there are three episodes
33:16in the book and in the movie that kind
33:19of caught my caught my eye and they
33:23speak to a little bit of why these
33:27things happen and why I'm skeptical
33:29about you know regulatory responses the
33:31first episode and they're not in
33:33chronological order first episode was
33:35when Madoff was sentenced to 150 years
33:38in prison with no hope of parole the
33:41judge said something like I'm going to
33:43make an example of you and I thought
33:48well you can make an example of him all
33:50you want to but the fact is there was a
33:54Bernie Madoff somewhere before him and
33:56there will be another one after him and
33:58you can't prevent that guy from coming
34:00into existence maybe you can stop him
34:02sooner but you can't really you can only
34:04make an example up to a certain point
34:06the second episode and this is one of
34:10the things I learned from your book that
34:11I did not know previously there was a
34:15moment when the SEC could have found
34:18this thing out in 2005 simply by asking
34:22what securities or how much in
34:25securities were being held in his
34:28depository trust account and he gave
34:32them the number and they bought they
34:33called up and they actually confirmed
34:35the existence of
34:36account and all they had to do was ask
34:38one more little question and they didn't
34:40do it and they would have found out that
34:42there was there was just not enough in
34:43there to to run the giant business he
34:47claimed to be running and the second the
34:49third thing I'm sorry was a little just
34:51a little side thing I noticed in the
34:53film where they're at a party a month or
34:56two before it all blows up in December
34:592008 so as may be in November October
35:01something and Ruth and Bernie are at a
35:04party and and Ruth says oh my sister
35:07wants to give us all her money something
35:09like that and Bernie just very
35:11offhandedly knowing it's all falling
35:13apart just says oh yeah sure no problem
35:15and you can imagine of course you know
35:18this is my sister so of course I trust
35:20her husband he's well known guy and and
35:25when I put these three things together I
35:27think you know it's gonna be really hard
35:31to ever catch somebody until after
35:33they've started doing this it's going to
35:35be really hard to train people to get
35:40people to the point where you know a low
35:43level government guy really cares enough
35:46to follow through all the way and I
35:48think that sloppiness I'm just afraid
35:50that that sloppiness that where they
35:52didn't look into the dtc account it's
35:54too much a part of human nature I agree
35:57with you at how frustrating is I mean I
35:59likened it to kind of watching the
36:01Titanic head for the iceberg watching
36:04these SEC Investigations unfold you keep
36:07wanting to say no no no steer make that
36:10phone call
36:10check those assets but I think if you
36:15look at the personnel the the level of
36:19training the level of experience and the
36:23mistaken stereotypes that regulators had
36:27about Ponzi schemes you begin to
36:29understand why they didn't make that
36:32extra call make that extra step do that
36:35extra effort they and the some extent we
36:40had a mistaken image of Ponzi schemes we
36:45think they're always going to involve
36:46high in the sky overnight riches that's
36:49one of the red flags
36:50right you know if it sounds too good to
36:52be true it probably is
36:53well a very smart fraud analyst named
36:56Pat Huddleston after the Madoff case
36:57rewrote that he said if it sounds too
37:00good to be true you're dealing with an
37:02amateur Ponzi schemers like Madoff know
37:06that if they want the big money if they
37:09want the smart money they can't make it
37:12sound too good to be true because these
37:15guys will see right through it they've
37:17got to make it sound good enough to be
37:19attractive in the among all the other
37:22options for investment that an applet
37:25person has but never so good to be true
37:28to too good to be true so that it would
37:31bring their alarm bells and Bernie had
37:33that down to a science he knew just how
37:36much to offer in the early part of 2008
37:40before this all started Bernie was
37:42paying 4% nothing screams Ponzi scheme
37:45about a 4% return so in as I say it was
37:50a failure of imagination but also
37:53mistaken impressions about what a Ponzi
37:56scheme a modern Ponzi scheme is going to
37:59look like it's not going to be run by
38:01some flashy you know ball river who's
38:05insisting you and you invest right this
38:07minute it offers you 50 percent a month
38:09it's going to be run by a nice low-key
38:11guy like Robert De Niro it's going to be
38:13run run by somebody who's going to make
38:15itjust sound attractive enough and
38:17that's going to do some not only
38:19investors alarm bells but regulators
38:23alarm bells as well this is not to
38:25excuse the SEC but just to just to point
38:28out that they were prone to some of the
38:31very same mr. sections about Ponzi
38:33schemes that the rest of us are on the
38:36dtc account that was one of the most
38:39chilling experiences that bernie talked
38:42with me about when i interviewed him in
38:43prison because i was trying to imagine
38:46what it's like yet hand this number and
38:50it happened is they didn't make that
38:51clear in the film but in real life what
38:53happened was it was friday afternoon and
38:56he had given them given the sec
39:01investigators the dtc account number
39:05not expecting that they would call and
39:08find out that there was nowhere near
39:11enough assets in his dtc account to to
39:15support the amount of money he was
39:18supposedly managing he spent that quiet
39:22weekend waiting to be arrested fully
39:25expecting they would make that call the
39:28jig would be up he would be done and I
39:31asked me sir how did you endure that and
39:35all he could tell me was a book you
39:38compartmentalize but this is a guy with
39:41absolute ice water in his veins I mean
39:45he coolly and calmly sat there and
39:48waited to be arrested and this was years
39:53before the fraud scheme finally fell
39:56apart so the he he had a sort of
39:57fatalistic resignation about how it was
40:01ultimately going to come down and just
40:04kept forging ahead the episode with
40:08Ruth's
40:09sisters assets it is in fact true that
40:12Ruth Ruth sister and brother-in-law lost
40:15virtually all of their assets with with
40:19Bernie they were all invested with
40:21Bernie and they all disappeared and to
40:24their credit they nevertheless stood by
40:26Ruth throughout the the years that
40:28followed Bernie's arrests and we're a
40:31significant source of support for her in
40:35those very difficult days and it's the
40:39way HBO handled it made it perhaps seem
40:41a little bit more off hand than it had
40:44been what they were I think trying to
40:49show there was the fact that Madoff did
40:53knowingly expose his entire extended
40:57family to ruin in this Ponzi scheme hey
41:02I mean he did that he Peter his brother
41:05his sons their children
41:09Ruth extended family they all invested
41:13with him so he had to know that when
41:16this
41:16fraud came crashing down it was going to
41:20hurt all of these people and when I
41:24pressed him on that and these prison
41:26introduced the best I could get from him
41:29was that he was certain that before it
41:31collapsed he'd be able to take quote
41:34take care of them but somehow whatever
41:37he'd get out with enough cash left that
41:40he could secure some kind of support for
41:43those nearest and dearest to him and in
41:46fact that's what he tried to do in his
41:48ignorance of the bankruptcy law he when
41:51the time that at the time the fraud
41:52collapsed he still had about three
41:55hundred and fifty four hundred million
41:57dollars in the bank not a small sum and
41:59he was frantically writing checks on
42:02that money to you know longtime
42:05employees to members of his family
42:07trying to spend the last of the money he
42:11had to secure their futures
42:14now the bankruptcy laws don't work that
42:16way every one of those checks was going
42:18to be cancelled the minute he filed for
42:20bankruptcy he couldn't have known that
42:22but I think in his mind he felt that he
42:26would be able at the end to protect the
42:30the dear ones that he was hurting no
42:33it's not oh but there's nothing logical
42:35about running a Ponzi scheme no no that
42:37was one of the really that was one of my
42:39favorite scenes in the film when you
42:40were pressing him on that and he just
42:43couldn't I mean I realize it wasn't
42:46Bernie
42:46it was Robert DeNiro but I thought he
42:48did a great job of being very cold as
42:50ice' customer and and and he came up
42:54with nothing remotely like an answer you
42:58would expect from a guy who was smart
43:01enough to engineer all this and keep it
43:02going for decades it was just a point of
43:05great failure and stupidity I think in
43:08his mind but you don't go into this I
43:12guess if you've got all your marbles
43:13anyway
43:15you know Diana I want to read one
43:17sentence from your book which is in fact
43:20the last sentence because I've been
43:24looking for a lesson from all this and
43:26as you can see I'm struggling with the
43:27idea of you know regulation and can we
43:30really protect people and and I've
43:32started out the podcast today talking
43:34about the importance of getting to know
43:35people who allocate capital but the last
43:38sentence in your book I think is really
43:40a great lesson and you say that is the
43:45most enduring lesson of the Madoff
43:46scandal in a world full of lies the most
43:50dangerous ones are those we tell
43:53ourselves and you referred a few minutes
43:57ago to you know how we're kind of
44:00hardwired to trust each other and maybe
44:02as soon as you said that I thought you
44:04know we're hardwired for a lot of things
44:06very few of those things none of those
44:08things make us good investors though
44:10well I am touched that you noticed that
44:13line I use it frequently as the as the
44:17core of the of the madoff lesson we have
44:23to be honest with ourselves about our
44:25own failings about our well they're not
44:27even really failing we have to be honest
44:29with ourselves about what we're like
44:32we're hardwired to trust each other
44:34which means we're not going to see the
44:38conman coming and to tell ourselves that
44:41we will it's just a lie to ourselves to
44:43say oh I'll never fall for a scheme like
44:45that you're just lying to yourself of
44:47course you can you know no more special
44:50than the 10,000 people who got caught in
44:53the Madoff scandal or the hundreds of
44:55thousands of people who get caught in
44:57Ponzi schemes every year on average a
45:00new Ponzi scheme surfaces every five
45:02days so there's nothing special about
45:05you that you're gonna you're gonna be
45:06immune to the Ponzi scheme so be honest
45:09with yourself about that and and make
45:12sure that when that you when you trust
45:16someone you also take the steps to
45:19verify the financial arrangements you
45:24make with them because you recognized
45:29your trust is going to blind you to the
45:31red flags that that you would otherwise
45:34see so I think if we're honest about our
45:37own limitations and you in reality these
45:41are lovely limitations the fact that we
45:43trust each other is what makes no happy
45:45homes and healthy communities and in a
45:48coherent nation you know mutual trust is
45:51not something we want to get rid of but
45:54we do need to recognize that it leaves
45:56us vulnerable but when we trust too much
46:00or unwisely it leaves us vulnerable so
46:03we need to be careful to verify the
46:07financial arrangements we make even
46:11though we trust the people we're dealing
46:13with Diana I cannot think of a better
46:15place to leave us we are out of time and
46:18that is that is exactly the message that
46:21I want to leave our listeners with thank
46:23you so much for being here Diana when
46:26you're when you finally do win a
46:28Pulitzer you've gotten you've been a
46:30finalist twice maybe we'll have you back
46:32on the program if you're not too famous
46:34for it
46:35thank you for having me I've loved the
46:38conversation all right wow what a great
46:41guest huh listen I
46:43I definitely I'm halfway through it and
46:45I'm gonna finish it real soon
46:47but I recommend reading this book The
46:50Wizard of lies Bernie Madoff in the
46:51death of trust by our guest Diana
46:53Henriques it is quite excellent that the
46:56reporting and the research and the
46:58detail in the storytelling and frankly
47:01the storytelling itself are excellent
47:03and by the way Diana is gonna speak at
47:07our annual Stansberry conference that we
47:11hold every year in Las Vegas and I hope
47:13you'll come out and and join us and
47:15listen to her because I know you know
47:18obviously she's a very insightful woman
47:20I mean she's you know just about darn
47:22near Pulitzer Prize winning stuff she's
47:24been around a long time covered a lot of
47:26stuff so Wow great guest great book and
47:31I'm sure she's going to do a great
47:33speech for us in Vegas
47:38so remember provokes your feedback is
47:41important to the success of our show and
47:43if you have questions comments whatever
47:46just email us at feedback at investor
47:50our comm we read them all we try to
47:52respond to as many as possible now in
47:57the days of Porter and buck they used to
47:59say we read all the emails and try to
48:02respond to every single one even the
48:04hurtful ones well guess what this is the
48:07second rant I promised you and it is
48:10called civility is no longer optional
48:13look I'm 57 years old I've done well in
48:18life I don't need to put up with nothing
48:20so if you're gonna call me a fraud and
48:23if you're gonna be uncivil and if you're
48:24gonna call me another guy called me this
48:26week a pompous killjoy and the guy who
48:30called me a fraud is a complete idiot he
48:32doesn't understand basic ABCs of reading
48:37financial statements and the difference
48:38between an index and an individual I
48:40mean it's just ridiculous okay but if
48:43you're gonna call me a fraud and if
48:44you're gonna behave in an uncivil manner
48:46in the emails I'm just going to ignore
48:48your presence forever I'm gonna stay as
48:52soon as your uncivil I'm gonna stop
48:53reading the email move on to the next
48:55one and ignore you so I'm not even you
48:59know when when they used to say even the
49:00hurtful ones
49:01well that was Porter and bucks thing
49:03that's not my thing I don't need to put
49:04up with it because I'll tell you what
49:06the mailbag here is a civil conversation
49:09between you and I the listener and and
49:12me about how can we become a better
49:15investor and you know to a certain
49:16extent what does Dan think right and
49:18that's all it is it's just a civil
49:21conversation about investing now if you
49:23have a criticism of something that you
49:25think I haven't done well
49:27be like Peter gee remember I mentioned
49:30Peter gee last week and I said he was a
49:32model correspondent he corresponds often
49:35he's sometimes highly critical if the
49:38things that he thinks I failed to do but
49:40he's never uncivil okay so be more like
49:44him if you want to write in and
49:45criticize and most people to be fair
49:48most people aren't like this right 95%
49:52of the folks are not uncivil but enough
49:54of them are that I felt like I needed a
49:57rant on civility you get the picture
50:00civility is no longer optional in the
50:02mailbag so moving on to mailbag question
50:05number one and I have five of them today
50:08I like to do more than one or two it
50:11says good day Dan I will keep this short
50:13thank you Thank You Russ S is writing in
50:17and I'm thanking and for keeping it
50:18short he says I'm a new listener and
50:20longtime true wealth subscriber and
50:22enjoyed the show I think you are doing a
50:24fine job this concerns the most recent
50:26episode this will be the last episode
50:29with dr. Richard Smith as guest when
50:32your rant with stock buybacks what about
50:35the practice of using debt to fund the
50:37buybacks is that a sound business
50:39practice especially if a company already
50:42has a large amount of debt on the books
50:43he says I don't support Schumer and
50:46Sanders either and find that trying to
50:48regulate / legislate normal business
50:50operations have usually backfired or
50:52certainly produced unintended unforeseen
50:55consequences thank you and keep up the
50:57good work regards Russ s Thank You Russ
50:59I totally agree with your implication
51:02here stock levering up the balance sheet
51:07and borrowing a bunch of money to buy
51:08back stock is just strikes me as
51:12fundamentally wrong even if the company
51:14is gushing cash flow and and can afford
51:18the debt it just strikes me as a very
51:21very odd practice now I can understand
51:24using the cash flow to buy back shares
51:27and and I even understand the basic you
51:31know sometimes there's an arbitrage here
51:33right if you pay at or let's say you pay
51:36a three percent dividend yield on your
51:38shares and you can borrow for two
51:40percent well there's a one
51:41percent arbitrage there right so so I
51:45get that but how far do you take it
51:48would be a good question and I think you
51:50know there's no general answer here you
51:51have to evaluate each individual company
51:54on this but I agree with you you should
51:57evaluate each individual company how
51:59much money are they borrowing why are
52:00they buying back stock it's a great
52:03question Ross thank you very much
52:05mailbag number two says Dan you imply
52:09that charging is a waste of time
52:11disagree my question does DOX investing
52:15options a waste of time I don't
52:17completely understand that question he's
52:18talking about dock I free sorry I can't
52:22answer to that question cuz I don't
52:23understand it
52:23I will chart everything of docks picks
52:26looking to capture a little of the upper
52:28downtrend of his pick I'm only looking
52:30to trade short-term only don't care if
52:33the market going up or down
52:35I do enjoy listening to your thoughts on
52:37different companies glad to see you
52:38relaxing with your new gig have more fun
52:41please Jeff our Jeff I'm trying to have
52:44as much fun as possible here and I thank
52:46you for for your for your your
52:49compliment actually I think I understand
52:51the question you're asking me if docks
52:54dock i frig's latest investing option
52:57strategy maybe or one of his options
52:59investing strategies as a waste of time
53:01nothing anything doc IFRIC does for his
53:04readers is a waste of time because he's
53:07cut a fantastic track record and he's a
53:09great guy and he's got experience you
53:12know for days I mean for decades really
53:14and he knows what he's doing
53:18but you said I implied that charting was
53:22a waste of time and yes in a previous
53:24episode I did say what most people do
53:28that's my point my point is not that
53:30looking at price charts as a waste of
53:33time
53:33I think that what most people do when
53:37they look at price charts as a waste of
53:39time because I think it's very
53:41simplistic and very first level it's not
53:44second level thinking it's not
53:46analytical it's just first level gut
53:48reaction naive what I would call naive
53:51technical analysis and I learned the
53:54term now you've technical now
53:55from a trader named Michael Harris who
53:58you can find on Twitter and and I just
54:03think that most people kind of are
54:05fooling themselves they're fully they're
54:07fooled by randomness in detecting these
54:10chart patterns and trading on them and I
54:12think it's just really it's a random
54:14strategy and they don't recognize the
54:15randomness but there are people who do
54:20sophisticated technical analysis and
54:22make money and and idle you know there's
54:24more than one way to skin a cat I'm not
54:26denying that but I think most people
54:29most individual investors are kind of
54:31foolish with their charting that's my
54:34point and of course I need to leave it
54:37to individuals to decide if they're
54:38fooling themselves you know mail bag
54:41number three says Dan absolutely loved
54:43the podcast thank you for doing such a
54:45great job of telling us what we need to
54:46hear I need your wisdom and experience
54:49here to set me straight it seems to me
54:52like there is a huge hole in this whole
54:55bull / bear discussion there are so many
54:58secondary factors consider to consider
55:00that it is pretty easy to make a case
55:03for either side the bottom line is
55:05because they are all secondary factors
55:08the whole discussion is based on logical
55:10guesswork for purposes of making money
55:13why can't we just forget about the
55:15market as a whole
55:16wouldn't it just make sense to buy the
55:18stocks the institutions are buying and
55:20sell the stocks they are selling if they
55:22are not buying go to cash this gets out
55:24of the philosophy business and cuts to
55:26the chase it would seem to me that the
55:28best economic indicator of all would be
55:30institutional sentiment the other
55:34discussions are fascinating but the all
55:35involved influences that may or may not
55:37apply let the institutions find it out
55:40and who cares if they're wrong they make
55:43the prices go up or down so follow them
55:45not the machination to people discussing
55:47disparate factors if this makes any
55:49sense how do we track and use this data
55:51I don't know if much thanks Don B Thank
55:56You Don B for your your complimentary
56:00words at the beginning of your question
56:03I question this whole idea
56:07because I don't know I mean I think
56:11there are people who do this there are
56:12people who watch money flows and you
56:15know purportedly make money buying
56:18stocks that other people are shoving
56:20money into but you know if you're asking
56:23me how do we track and use this data it
56:27sounds to me like maybe you haven't
56:28thought this through and don't know
56:30enough about it I sure don't because I
56:32would never do it
56:33I would never base anything I'm doing on
56:36what some other investor is doing which
56:37is what you're telling me you want to do
56:39here and and I don't think well let me
56:43put it this way it's possible that you
56:46could have a trading strategy here but
56:49really all you have is the faintest
56:51glimmer of the beginning of morning you
56:52have a lot of work to do and how do we
56:55track and use this data beats the heck
56:57out of me good luck Don if you figure it
57:00out right back in mail bag number four I
57:04loved loved loved your first weekly rant
57:06Dan this information you shared about
57:08Facebook was both enlightening and
57:10frightening also you're my favorite
57:12investor our host I have learned much in
57:14the several months during which I've
57:15listened to the podcast before and since
57:17you've been hosting I realized that
57:19politics certainly affect the stock
57:20market however I thoroughly appreciate
57:23that you're neither political nor vulgar
57:25very professional Dwight D Thank You
57:28Dwight I included this obviously because
57:31it kind of speaks to my little second
57:33rant about being civil and yeah I'm
57:36gonna try really hard never to be vulgar
57:38and I'm gonna be very civil and never
57:40throw insults out unless in the past I
57:43have insulted some people when they've
57:45called me a fraud or something like that
57:48only but in the future I'm just gonna
57:51ignore that whole thing and we're gonna
57:52have a very civil discussion in the
57:53mailbag every week last one mail bag
57:56number five TJ says I've gone in circles
58:00looking for transcripts to these
58:02episodes where the hell are the links to
58:05them TJ TJ calm down dude they're there
58:09I promise what happens I think sometimes
58:13is that we don't get the latest
58:16transcript up as fast as we put up the
58:19episode it just takes a little bit
58:20time but if you go back to previous
58:23episodes just go to investor our comm
58:26scroll down to whatever episode you want
58:28click on it and when you get to that
58:30page then scroll all the way down and
58:34and the transcript will be down at the
58:36bottom of the page okay so if you're if
58:39you're looking for the transcripts
58:41that's where they are and if you're
58:44wondering why you can't find the
58:45transcript for the latest episode it
58:47just takes a little time and that that's
58:50the answer okay
58:51all right folks that is it that is
58:54another episode of the Stansberry
58:55investor hour podcast i'm dan Farish
58:58your host i can't wait to talk to you
59:00again next week be sure to check out the
59:02recently revamped website where you can
59:04listen to all the episodes we've ever
59:06done and see show transcripts and where
59:10you can enter your email to make sure
59:11you get all the latest updates just go
59:14to that same address
59:15ww investor our comm that's it for this
59:19week talk to you next week folks thanks
59:21for listening
59:24[Music]
59:26thank you for listening to the
59:28Stansberry investor hour to access
59:31today's notes and receive notice of
59:32upcoming episodes go to investor our
59:34comm and enter your email have a
59:37question for Dan send up an email at
59:40feedback at investor our comm this
59:43broadcast is provided for entertainment
59:45purposes only and should not be
59:46considered personalized investment
59:47advice trading stocks and all of their
59:50financial instruments involves risk you
59:52should not make any investment decisions
59:53based solely on what you hear
59:55Stansberry investor hour is produced by
59:57Stansbury research and is copyrighted by
1:00:00the Stansberry radio network

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