There is no such thing as a Sophisticated Investor

We listen to Bob Brinker every weekend and his manner of steam rolling the listeners gets annoying at times.  However, Diana Henriques is one of the few guest authors who (1) gets challenged directly by Bob Brinker and (2) solidly holds her ground with a lucid explanation on how Bernie Madoff and mutual funds have more in common than most people are willing to admit.
The following is a transcript, in part, of a recent interview that Bob Brinker had with Diana Henriques about her book Wizard of Lies: Bernie Madoff and the Death of Trust.  Diana is clear on one thing that all investors should understand, even a well known and well established mutual fund company should be questioned on it's integrity.  The clarity in Diana Henriques' responses while getting grilled by Bob Brinker requires that we recommend reading this book.
Diana Henriques:

 

…there on your statement, it looked like you owned a widely diversified portfolio of blue chips, everything from J&J to Wal-Mart, and so you had this sense, ‘well I am kinda diversified,’ there was this illusion of  a diverse portfolio and you move into cash safely and into treasury bonds and back into these blue chips, so not to defend people who were willing to trust every penny they had to Bernie Madoff, they may have been deluded by the notion that they did have a balanced and very highly diverse portfolio almost like a mutual fund, of course it was nothing like a mutual fund, in fact, and the notion that you would give all your money to Bernie Madoff, in hindsight, of course looked dreadful, but how many of your listeners actually invest all of their money with Vanguard or different mutual funds but they will invest it all with a fund family because of the convenience that comes with it."
Bob Brinker:

 

(interrupting Diana) "That’s a good point, that’s a good point, but I’m willing to propose to you that a listener that invests with the Vanguard, a listener that invests with a Fidelity, a listener that invests with a T. Rowe Price, can simply not be compared to somebody giving their money to Bernie Madoff.  He is not Vanguard, he is not Fidelity, he is not T. Rowe Price."
  
Diana Henriques:

 

"Yeah, but neither is he Joe’s Plumbing and Ponzi Scheme operation down on the corner.  He was a very respectable."
Bob Brinker:

 

(interrupting Diana) "No but actually he was that Diana, he had a po-dunk auditing system set up in a storefront in NY, I mean, he was Joe’s Plumbing and Heating."
Diana Henriques:

 

"I’ve got to disagree with you there because I knew Bernie Madoff back when he was in the wild before he was in captivity, and I knew his firm very well.  As a reporter at Barron’s it was one of the first places you’d call if were trying to find out what news, what impact, breaking news would had had on specific stocks or segments of stocks.  For example, the night the first gulf war broke out, it hit us in NY at a very tough time right against our deadline for the next day’s business section.  We took the whole section apart and put it back together again.   Well, what would the out break of war going to mean to the oil stocks?  How do you find out? The NYSE had been closed for hours.  You called Bernie Madoff, because he pioneered after hours trading.  There was a period in time when Madoff’s trading firm handled up to 10% of the daily volume of the NYSE stocks;  in what is called the third market.  We didn’t know him as retail investors, I knew him as a business reporter, but he had no retail customers, so far as we knew.  He was a wholesale trading house but he was very well known on the street as a whole sale trading house one of the biggest, one the fastest, one of the most technologically advanced and a firm that had always set the standard for the speed of processing orders, so I have to disagree with you, people who knew wall street and who did a little 'due diligence' on Bernie Madoff would have learned that he was a very well respected wholesale trader."

 

Bob Brinker:

 

"All of which led them to the false conclusion that he was someone that you could do business with."

 

Diana Brinker:

 

"Yes…and he was someone that they could trust."

 

Bob Brinker:

 

(interrupts Diana while she is talking) (incredulously says...) "TRUST!…are you serious Diana?…you could trust!…what do you mean you could trust?"

 

Diana Henriques:

 

"He was someone certainly that they thought they could trust clearly they would not have given their money to him otherwise.  On the surface, you know Bill, a shifty eyed guy with a cheap suit and scoffed shoes may commit a lot of crimes but a ponzi scheme is never going to be one of them.  Ponzi schemers are by definition done by people who seem trustworthy, if they’re not they can’t even start.  The can’t pull it off.  So, people who think they would instantly recognize a crook like Bernie Madoff, are deluding themselves.  That’s one of the dangerous lies we tell ourselves.  They’re going to look like responsible respectable people."

 

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