The economist/lawyer/columnist/actor says he was approached two years ago about investing with Madoff. As Stein writes in the NYT, several folks from "a major investment bank" said they knew this guy who never lost money - that he had a strategy of buying stocks and hedging with options.
I protested that a perfect hedge would not allow making any money, because money made on the one side would be lost on the other. They assured me that this genius had found a way to spot market inefficiencies and, indeed, to make money off a perfect hedge. I thanked them for their time and promptly looked up Bernard Madoff online. Nothing I saw was even a bit convincing that he had made a breakthrough in financial theory. Besides, this large financial firm was going to charge me roughly 2 percent to put my money with Mr. Madoffís firm. I could invest my few shekels with Warren Buffett for no management fee at all.
I have never heard of an entity that could make money in all kinds of markets consistently, year in and year out. Yet we continue to believe that there will be one. It is, like much else in finance, a myth that will not die. I have never heard of a financial manager who promised to be able to defeat the markets anytime he chose and who, in fact, was able to do so. Even Mr. Buffett says repeatedly that he will have losing years and losing stretches of years. (Wow, is he right this year.)
Lesson #1 from the Madoff mess: Donít ever believe claims that on their face donít make sense. Easy to say now, I realize, but apparently there were lots of people who detected more than a slight odor during the height of the scheme. By the way, Stein, who lives in Bev Hills, notes that he found his "own inventive ways to lose money on a colossal scale during these last 15 months."