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July 31, 2018


Luis Enrique

on fund managers, am I wrong to think it's impossible for the average fund manager to beat the market, because (if we set aside trackers for obvious reasons) they *are* the market? OK, professional fund managers could systematically outperform investments made by private individuals, but are there enough IC readers*, relative to the sums held by asset managers, to make measurable out performance of them plausible?

If so, I don't see the point in complaining fund managers fail to do the impossible. Your choices are

1. buy a tracker and get market returns
2. do your own stock picking for a chance of beating the market
3. pay a fund manager for a chance of beating the market

In expectation 3 = 1 minus fees. What would justify choosing 3 - being risk-loving and preferring to outsource? A world in which some fund managers are systematically better than others, and some belief in your ability to identify them?

(of course fund managers can mislead about their chances of beating the market, and charge too much too boot, so I'm not disputing the label of fraudster, much in the same way I'd not dispute it applied to a vendor of expensive shampoos).

* let us set aside the question of whether your (and my former) employer defrauds its readers

Brad the Nuck

There was a time long ago when I was a student of economics in a Canadian university. "Why" I wondered "don't people outside of Canada take more note of what happens in Canada?" Now I live in a world where that issue has been solved. There is a "Canada" option for a Britain seeking its departure from the EU. There is also a "Canada" option for Americans who are dissatisfied with their healthcare system. And here I find Canada as an example in a discussion of fraud. And do you know what? I'd really like to go back to the days where everybody ignored us. You know, the good old days where everyone assumed we were all a polite but dim type of American. Please?


People believe what they want to believe.

There are internet frauds out there that are incredibly basic - a website with pictures of machinery, with some semi-plausible reason why its so cheap (its been repossessed on finance, you only have to pay the outstanding balance, who knew finance companies were so generous?), no contact details beyond a mobile number or email address, a promise to deliver worldwide, and people fall for it hook line and sinker time after time, sending money by online transfer to bank accounts that are cleared out the moment any money lands in them. People part with thousands of pounds without having kicked a single tyre, all on the strength of a few pixels. And these frauds aren't even sophisticated. The pictures are obviously dragged in from all over the place (you'll have a picture of a machine in a hot sunny climate next to one in a foot of snow), the address given for a machinery dealership will be a housing estate in Birmingham if you bother to google the postcode, etc etc. And people fall for it because they want to believe they can get a bargain when no one else can, that they're being ripped off by the established dealerships, and the 'good stuff' is out there somewhere, if only they could find it. And the scammers deliver it on a plate.......


While anyone can fall for this, it does seem there is much more susceptibility for the greedy and fearful, and it seems as often distrust of dominant institutions and prominent authorities lead to unwarranted trust in individuals. We seem to have trust budgets, and the failure to trust those we should, lead us to trust those we shouldn't whether due to affinity, charisma, or gullibility.


A friend of mine undertook research into the value of cultivating norms of honesty and integrity within guilds and professions as a low cost means to build trust and lower the costs of policing contracts. The problem is that crooks will always find their way into those trust-based systems and exploit them. Hence the metaphor of the wolf in sheep’s clothing, or the shark in a pinstripe suit. I was very much reminded of this watching Alexander ‘Bertie’ Nix’s testimony in Parliament. He has the full suite, education, accent, mannerisms, signet ring, patrician air. But these are gimmicks, and he would appear to have done some pretty rotten things. My father, an Officer in the Indian Army, once gave me a warning: “be careful, the perfect manners and dress, they are a sign of dark secrets, or an English public school education, which usually amount to the same thing”.


@Luis Enrique

Re your option 2. Back in 1992 Jim Slater published a book titled "The Zulu Principle" about investing. The essence of it was that to beat the market, you had to know more about a small number of companies than the average (professional) market participant. I tried this for a number of years in the 90s with some success (I was a regular IC reader as well) but in the end I stopped because I decided that the opportunity cost was too great - my investments were not going to make me life-changing amounts of money, I was already comfortablely off and it was easier just to let someone else take the decisions.


For the psychology of the "suckers" see this book:


I like this post and in particular the denial that “Fraudsters don’t play on moral weaknesses, greed or fear: they play on weaknesses in the system of checks and balances”.

I would split the difference by saying that fraudsters *succeed* by playing on greed or fear, and are *enabled* by weaknesses in the system.
Indeed the first thing fraudsters (in a late sense) do is to pay politicians to weaken the system of checks and balances. Consider how the current Conservative government in order to cut the deficit has cut 40% from the budget of the tax office cutting savagely the number of tax auditors. Big savings for tory taxpayers!
Or consider how the Republicans and the clintonites in the USA have substantially weakened regulation, down to exempting finance executives from criminal law under an explicit doctrine of "too big to prosecute".

Finally I'll repeat here The Second Blissex principle: all nontrivial frauds are based on insufficient depreciation (corollary: almost all cases of insufficient depreciation are motivated by fraud).



Could you explain your second principle for the hard of thinking among us please?

Also, interested in the first and any other principles?

Ralph Musgrave

"And cynics might add that newspaper columnists, think-tankers or politicians are similar to affinity fraudsters; they take money for misleading like-minded people."
Subscribing to that idea isn't "cynicism": it's an understanding of reality. I.e. a significant proportion of self styled intellectuals are windbags, idiots, fraudsters, etc.

Jesus probably had that in mind when referring to "scribes and Pharisees". And Julien Brenda referred to the "trahison des clercs".


«explain your second principle»

I'll try briefly...

“all nontrivial frauds”: the trivial frauds are based on simple lying, like false promises, forgery, etc. The problem with that is they eventually can be proven, when the lying is exposed.

Non-trivial frauds are those that are in essence a matter of judgement, that is based on bullshit rather than lying.

To be profitable a fraud must involve bigger revenue than costs. The best bullshit that generates that is in essence "jam tomorrow", revenue now, costs later, that is the mark pays the con now expecting to have a gain later.

The best way to arrange that is to separate the cash account from the profit-and-loss account, and generate illusory profits, to be cashed in by the con now, while the mark waits until later to cash them in.

That always requires that the illusory profits be generated by underestimating costs rather than overestimating revenues, because the latter does not generate cashflow, but underestimating costs does, and the cons take their money (and run) from cashflow.

The best way for a con to underestimate costs is to underestimate future costs, not current costs, that is to underdepreciate (whether risk, maintenance, etc.).

Consider the common practice in finance of selling a multiyear loan, with the bonus paid to the salesman on the notional present value of the whole duration of the loan, without taking into account the actual riskiness of the loan.

Then when the depreciation happens "who could have known?", "it was the copula!", etc.

Put another way, underdepreciation is the least risky way to tunnel cash out of the mark while generating the cashflow to do that.

derrida derider

On the issue of (economic) fitness-enhancing trust and a subpopulation who defect by ripping trusting people off, it seems to me an obvious case for the game theorists. Canada must have had, for a long time, an ESS with a minority employing the equivalent of the "sneaky fucker" strategy (there's a whole new mmeaning for that technical term).

There's a lovely PhD thesis in there somewhere - but then it's probably already been done. Anyone know if that's so?

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