It is amazing what intelligent people are willing to believe when paid enough money.

So many of the rich and the elite willingly invested with Madoff in spite of suspiciously good returns. “I don’t know how he does it, he just does,” was a common response to those who questioned his method. Certainly his stature as an ex Nasdaq chairman gave him a credibility, but should that have entitled him to a secret no one else in the investment world possessed?

To even a modest analyst or regulator his claim of an options strategy should have alerted their skepticism; there weren’t enough options in the market to fund such a strategy for the amount of money he had invested. But the sheer size of his fund gave him legitimacy. Many of the rich elites he managed felt entitled to the superior returns that are unavailable to the little guy left with mutual funds with high fees.

Yet the little guy expecting his house to appreciate year after year was just as foolish. ‘Get rich quick’ hucksters and the real estate industry knew that pure demographics would be putting pressure on housing. Retiring baby boomers would be downsizing and moving into smaller homes, with fewer younger parents to buy the old larger homes.

Markets regress to the mean. Housing, gasoline prices, China, scrap, tech stocks- nothing goes up for ever. Nor have I ever seen a market rise exponentially and then just level off.

I do not think it is just a coincidence that the bursting of the housing bubble and the outing of Madoff happened simultaneously. Government sponsored Fannie Mae and Madoff are one and the same; they pushed impossible returns using plain deceit that everyone was willing to believe as long as they profited from it.

But while Bernard Madoff will be drawn and quartered in the public square (justifiably in my opinion), no one from Fannie Mae will serve a day in jail.

John Bogle writes in the Wall Street Journal Online-

Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street’s 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor’s 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.
Reality: the S&P closed the year at 903, with reported earnings estimated at $50.
Strategists aren’t always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003.

Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street’s payroll don’t survive for long.

from Ben Stein in the New York Times 12/26/08

They Told Me That Madoff Never Lost Money

excerpt- see entire column here

We are more than our investments. We are more than the year-to-year or day-by-day changes in our net worth. We are what we do for charity. We are how we treat our family and friends. We are how we treat our dogs and cats. We are what we do for our community and our nation. If you had $100 million or $100,000 a year ago and now you have a lot less, you are still the same person.

Losing and making money are not moral issues so long as you are being honest. You may have a lot less money as this year ends than you did two years ago. But you are just as good or bad a person as you were then. It is a myth that money determines who you are, and if you have gotten over that myth by now, then 2008 will have been a very good year.

We are entering the New Year with a lot of pessimism about the stock market and the economy. While I have strong concerns I am optimistic for several reasons.

We have already had a strong move down with a nearly 40% drop in most indexes.

The conventional wisdom is that the worst is ahead. In such strong moves the conventional wisdom is often wrong. At times like this it pays to be a contrarian.

Unlike the Great Depression the Government is not taking a hands off approach. In fact they are bailing out everything in sight. While this may have serious inflationary consequences later I think it may not for several reasons. There are strong deflationary forces in lower fuel and commodity prices, an economic slump, rising unemployment, and the prospect of imports looking for a market in America. While our market is being battered, the rest of the world is having an even worse response.

There are also strong deflationary forces in the budget cuts in state governments who do not have inflation as a tool. Paul Krugman wrote an article called 50 Hoovers, lamenting the deflationary impact of state government budget cuts when the government should be spending to stimulate the economy. The state budget cuts may be counteracting the stimulus of much of the federal spending.

While the news is negative my eyes are telling me a different story. Malls are still crowded even though business is down. A friend travelling noted that all of the flights to Hawaii on a particularly day were overbooked. Restaurants are still crowded.

I will acknowledge that business is down. Car dealers, home builders and banking are getting hit exceptionally hard, but while homes were overpriced they are approaching a normal level where sales will eventually pick up. They may go further but they are closer to a bottom than a top.

Finally there is a ton of cash out there, and the fed is inflating strongly. This money has to go somewhere. When the fear abides and the cash enters the economy’s bloodstream we will see a bounce. Expect a higher Dow this year.

Will a one party government have the discipline to reign in the inflation when the recovery ensues? Will they be able to make the decisions to cut spending and make tough choices? That remains to be seen.

I have searched for a good Value manager, but many who claim to be are not. I have found a manager who is, but his minimums are high, a million dollars. Contact me if your are interested in reaching him.

The Fairholme Fund is a great alternative for those who can swing the minimum $2500. Since 12/29/1999 the fund is up 240% while the S&P 500 is up less than 1%. during the bad sell off in 2002 when the market was down 20% Fairholme was down less than 2%. Their true value technique is simple: “be fearful when others are greedy and be greedy when others are fearful.”

Not surprisingly, some of their holdings match the private money manager.