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Don't Fall: A Short History of Financial Scams



Ben Carlson



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Business success books sell. But overflowing with survivorship bias - the less successful don't write books. And in fact, avoiding stupidity is more useful than trying to emulate success.

People retain three times as much info when they're entertained.

You cannot predict the future. If you were British:

In 1900, if you were a Brit, you wd have looked anxiously across Channel at France, your greatest enemy.

In 1910, France was yr ally, and Germany was yr enemy.

In 1920, WW! had been won, and you were now in a naval arms race with yr erstwhile allies, the US and Japan.

In 1930, the Great Depression was underway, and everyone was cutting miltary budgets, confident that no war was offing.

In 1940, WW2 had begun, engulfing the whole planet.

In 1950, Britain was no longer a great power, and the Atomic Age had started.

In 1960, the Cold War with Russia

In 1970, Vietnam had exhausted the US, and detente with Russia had begun.

In 1980, Russians were in Afghanistan, and US was world's creditor.

In 1990, the Soviet Union was about to fall apart, the Berlin Wall was about to come down (Nov 1991) and no-one had heard of the Internet.

In 2000, eastern Europe independant, and a huge range of computer-based industries was revolutionising the world. By 2010, we'd seen tsunami, 9/11 and Great Financial Crisis of 2008.

The one constant of human existence is irreducable uncertainty.

Philip Tetlock is an expert on tracking forecasts of other experts. He's found that the greater the level of expertise, the lower the accuracy of the forecast (as well as the higher the level of confidence in the forecast).

Two constants: (1) the world is getting better and (2) most people think it's getting worse. The following headline could have appeared every day for last 50 years: Number of people in extreme poverty fell by 137,000 since yesterday

How Dunning-Kreuger Effect actually plays out: Rule 1: everyone is an over-confident idiot some of the time. Rule 2: We always forget Rule 1 when we are being the idiot.

Chartles Darwin had a golden rule for when he came across anything that contradicted his own beliefs - he immdeiately wrote it down. Because, he said, he found that he quickly forgot those facts or suggestions.

No matter how much money you have, if you're still worried, you aren't rich. (Interview just about any rich person. No matter how rich, they ususally say they need about three times what they have to be happy.)

Fred Schwed, who wrote Where Are The Customers' Yachts?, wrote that "speculation is an effort, mostly unsuccessful, to turn a little money into a lot, while investment is the effort, which shd be successful, to stop a lot of money turning into a little."

Warren Buffett: "You only have to invest all your money ONCE in something you don't understand, to lose it all." Nearly every success story is accompanied by a lucky break. Apple was bailed out by a loan from MicroSoft in early 1990's, without which it could have collapsed. Coca Cola became a success after someone accidentally carbonated the drink. Viagra originally intended as a heart remedy which failed.

Charlie Munger quoted old syaing "What good is envy? It's the one sin that gives you no pleasure. It's 100% destructive. Envy is crazy. Revenge is crazy. Resentment is crazy. If you can get those habits out of your life early, your life works out a lot better."

It's not that having lots of stuff is bad, it's that the desire to have more and more is insatiable. As long as you think more is better, you can never be satisfied.

There wasn't a lot of use for glass for a long time (it was far too expensive for most people to use as windows). But the invention of the printing press led to a lot more readers, and many of them found they were far sighted. This led to sky rocketing demand for reading glasses, and encouraged experimentation in lenses, leading to both telescopes and microscopes.

The dot comm bubble took out a lot of investors, but one positive. Telecomms raised $2 trillion in equity, and anothewr $600 billion in debt, and usewd it to lay 80 million miles of fibre optic cables. By 2005, cost of bandwith had fallen by 95%.

Something similar with railway mania in England in mid C19. Fraudsters and speculators ruined many small investors, but long term benefits. By 1865 britain had 8000 miles of track, allowing businesses to serve large markets, and people to travel far and wide. In 1840's more than half a million people employed building those railways, many of them Irish fleeing famine. Basically a transfer of wealth from the upper and middle classes to the laboring classes.

Robert Shiller in Irrational Exuberance defined herd mentality and speculative bubble as a situation where news of stock price increases spurs investor enthusiasm, spreads from person to person, in the process amplifying stories that might justify the price increases, thereby bringing in a larger and larger group of investors who are partly motivated by the success of others, and partly by through gambler's excitement.

Isaac Newton one of the smartest people of his age, yet he managed to lose £20,000 (about £20 million today) in South Sea Bubble. FOMO (fear of missing out). He was an early investor, and sold his shares doubling his investment. But when price continued to rise, he bought back in at twice the price he'd sold at, shortly before the market crashed and he lost 80% of his capital.

Elizabeth Holmes Theranos conned the rich and famous: the Walton family lost $150 million. Robert Murdoch lost $125 million. Betsy DeVos and her family lost $100 million. Jim Mattis and Henry Kissinger were on the board, and they thought Holmes was another Steve Jobs. But the whole thing was a fraud from start to finish.

Personalizing success sets you up for massive failure. You treat success as a matter of personal ability rather than being in the right place at the right time, or just being lucky. When you have money and recognition you think you are invincible.

Psychologist Stephen Greenspan wrote The Annals of Gullibility: Why We get Duped and How To Avoid It. It was published shortly after Bernie Madoff was revealed to be the biggest Ponzi scheme fraudster of all time. It then turned out that Greenspan lost a sizeable chunk of his retirement fund investing in Madoff.

Barnum effect: horoscopes are so generalized that they apply to almost everyone who reads them (and who are usually keen to believe them).

Billy Vanderbilt doubled his father's legacy of $100 million. But he said this about his neighbour: "He isn't worth a hundredth part as much as I am, but he has more of the real pleasures of life than I have. His house is as comfortable aas mine, even though it didn't cost as much, his team is about as good as mine, his opera box is next to mine; his health is better than mine, and he will probably outlive me. And he can trust his friends.

Half-life is a scientific measure of how long a radioactive element takes to lose half its radioactivity. There seems to be a similar measure for family wealth. The top 10 families by wealth in 1918, 1930, 1957 and 1968 saw their wealth cut in half in 13 tears, 10 years, 13 years and 8 years respectively. The old saying that first generation makes it, the second generation mainatains it and third generation spends it. But this might be too generous to the second generation. A survey of Forbes 400 found that second generation lost half their wealth in 24 years, while third generation took 11 years.







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