On Elon Musk, Charles Ponzi, Bernie Madoff & More
On Elon Musk, Charles Ponzi, Bernie Madoff & More
What do these Wall Street legends have in common?
Welcome to the 800+ Global Guru fans and 1950+ Twitter followers (@NickVardy) who have joined us in our first four weeks on substack.
Today, I am experimenting with a new format for The Global Guru.
The Global Guru has always been about 800–1000-word posts on mostly finance-related topics.
But as media channels have expanded, we get our information from many different sources.
Information is also shared in bite sizes as attention spans have dwindled.
This new format for The Global Guru attempts to address those changes.
On the one hand, it chunks information into short summaries.
On the other, it also allows you to explore more by following the links I have provided.
Below are five exciting ideas to spark your curiosity as you enter the trading week.
Today at a Glance:
· Quote: Do you still believe in Elon?
· Tweet: Elon Musk is not who you think he is.
· Mental Model: “Authority” as a “weapon of influence."
· Article: Lessons From the Life of Charles Ponzi
· Documentary: Bernie Madoff, The Monster of Wall Street
One Quote:
" Tesla stocks trade like tokens in the Musk fan club”
-Banker quoted in the Financial Times
A bet on Tesla stock has always been a bet on Elon Musk
Recently, both Musk's reputation and Tesla's stock have taken a beating.
Tesla’s stock has dropped by as much as 70% from its highs.
Musk’s net worth has plummeted by more than $200 billion.
As Musk’s reputation fraying at the edges, do you agree with Tesla’s bulls that the stock will rebound?
I’m not so sure.
Tesla, today, is still worth over $378 billion- about the equivalent of Toyota, VW, GM, and Ford combined.
One Tweet:
Elon Musk has been the subject of increasing scrutiny and skepticism as the Tesla bubble deflates.
(Click on the image for more)
Nor is this tweet a one-time affair.
An entire Wikipedia page is dedicated to the criticisms of Tesla
One Mental Model:
Robert Cialdini’s “Weapons of Influence”
Psychology professor Robert Cialdini is no ivory tower academic
Cialdini spent three years undercover, working at used car dealerships, fundraising organizations, and telemarketing firms to observe real-life examples of persuasion.
The result was Influence: The Psychology of Persuasion.
The book established Cialdini as one of the most prominent social psychologists in the world.
Thousands of salespeople across the world consider Influence their bible.
You'll recognize Cialdini's “six weapons of influence” footprints in almost every sales pitch you hear.
One of Cialdini’s weapons of influence is Authority.
This is based on the observation that we tend to obey authority figures, even when their orders are objectionable or make no sense.
Cialdini cites the famous experiments by Stanley Milgram in the early 1960s. Most of Milgram’s subjects were persuaded to give what they believed to be real electric shocks to Milgram’s associates because an authority in a white lab coat told them to do so.
You see deference to authority on Wall Street every day.
You buy a stock citing Goldman Sachs’ “Buy” recommendation.
You pile into stocks that you heard the top hedge funds are buying.
Or you buy Tesla because Jim Cramer said, “There is no ceiling.”
Elon Musk is well aware of the power of authority.
Musk has spent his career padding his resume to enhance his authority with investors and the world.
He boasts that he studied engineering. Yet his degree from the University of Pennsylvania is in economics.
Musk claims he dropped out of a Stanford Ph.D. program in Physics after a day.
Yet, Stanford has no record of him ever enrolling.
Musk says he has Asperger’s syndrome, which endows him with unique perspectives and out-of-the-box thinking.
Yet there is no evidence he is on the spectrum.
The lesson?
Don’t listen blindly to authority figures.
Understand the power of this critical weapon of influence before you make any investment decisions.
One Article:
Lessons From the Life of Charles Ponzi
Few on Wall Street achieve the enduring infamy of a financial antihero named Charles Ponzi.
Ponzi even earned his name a place in the Oxford English Dictionary.
The lessons from the life of Charles Ponzi are timeless. A few stood out to me.
What Is a Ponzi Scheme?
A Ponzi scheme is a type of investment fraud that promises large profits at little risk.
A promoter tells investors he can earn astonishing profits by employing some arcane – often secret – investment strategy.
A Ponzi scheme is sustainable as long as new investors contribute new funds and do not demand full repayment.
When the money flow runs out, the scheme falls apart.
Promoters Are Larger Than Life Characters
Born in Italy, Ponzi began his infamous scam in early 1920. Ponzi offered to pay investors 50% interest in 45 days and 100% in 90 days. Investors cared little – and understood even less – about the details. They cared only about the promise of quick riches.
Ponzi eventually pleaded guilty to charges of theft and mail fraud. When he was released from jail in 1934, he was deported to Italy.
Ponzi ended up in Brazil, making a meager living teaching English. He died in 1949 with just $75 to his name.
How to Identify a Ponzi Scheme
To identify a Ponzi scheme, here’s what you should look out for:
· Guaranteed promises of high returns with little risk
· Consistent returns regardless of market conditions
· Investments that have not been registered with the Securities and Exchange Commission
· Investment strategies that are secret or too complex to explain
· Lack of paperwork for clients’ investments
· Difficulties withdrawing clients’ money.
Bernie Madoff’s Ponzi scheme (see below) fits this description to a “T.”
To read the entire article, click here.
One Documentary:
Netflix documentary Madoff: The Monster of Wall Street,
Bernie Madoff was the architect of the greatest Ponzi scheme in history. At the time of its collapse, Madoff's fund had a notional value of $64 billion- though only $19 billion was ever contributed by investors.
Three points stood out to me:
·Madoff’s collapse came after years of warnings, including a Barron’s piece headlined “Don’t Ask, Don’t Tell: Bernie Madoff Attracts Skeptics” in 2001.
Harry Markopoulos, a Boston analyst, spent eight years informing the SEC about the Madoff scam, only to be ignored. As with crypto, Wall Street, regulators, and investors chose to look the other way. Too much money was being made.
Madoff had plenty of “authority” in Robert Cialdini’s terms. He was an innovator who pulled all pink sheet stocks onto one computer screen. That became the NASDAQ. He had that legitimate market-making business and was, at one point, responsible for almost 10% of the New York Stock Exchange volume. His positions on boards and Palm Beach country club memberships offered credibility to attract money.
Madoff’s story offers lessons in understanding today’s frauds like Sam Bankman-Fried. Like Madoff, SBF was celebrated for his unparalleled financial genius before being exposed as a dangerous fraud. Same story, but different characters.
And I predict more frauds will be exposed in 2023 as the “Everything Bubble” continues to unravel.
You can watch the Madoff series here.