The joke I often hear in the market is ‘sophisticated investor’ aka ‘big investor’ or what have you. The assumption is:

• he is a big rich man (true)
• has access to the finest investment brains (not always true)
• he checks with the smartest people about ALL his deals (not always true)
• he has controlled is greed, fear and ego (rarely true).

So when a Jignes (why waste a ‘h’?) runs a scheme which gives smooth regular returns, they look at me and say “See Subra, good regular CONSISTENT results, and you told us not to invest”.

Those who understand English and Equity do not use the words “consistent results” with equity investments. Even with debt funds, it is difficult, but with equities, it is IMPOSSIBLE.

Now what drives nice, smart, incredibly rich investors to Jignes’s ponzi scheme or Bernie Madoff’s scheme?

For 2 decades (yes you heard right 20 years) Madoff gave 1% return month on month.

Imagine if I had asked somebody about 8 years into the scheme how Madoff managed it, I would have been met with a sneer! and things worked for 2 decades. So I would have been told “boss it is working for 14 years, WHY do you think it will not work forever”.

It worked like this:

Create a small club – make it sound exclusive

Use big high sounding words – which nobody will ever admit that they do not understand – Hedge fund.

Use invites to the Uber rich with tons of ego. Then constantly tell people “this is not an easy club to get in, but we will try”. Then make sure that you keep throwing out people once in a while.

Now a person who gets invited to such a club goes to his Investment adviser. IA is overwhelmed that his client has got invited, but the poor adviser will never ever get invited. CONFIRMATION BIAS seeps in. It will take a real brave adviser to say “this sounds like shit” or “if it is too good to be true, it must not be true”.

So the club thrives. So Jignes can give his “risk free, exchange guaranteed 12% pa for 3 years and Madoff can give 1% p.a. for 2 decades. Of course it was a ponzi scheme where the new guys were paying from their CAPITAL to keep the old guys happy.

So why does a ‘sophisticated investor’ (Oxymoron?) fall for it?

• exclusive club
• one club member says “I will try to get you in, but it is tough you know”
• when the offer comes it is always “you need to make up your mind in 2 days” type of offer
• the client has no time to ask his adviser, or he is told not to ask

Wow. He is in. Into this exclusive club of Jignes bhai’s investing club. Or Madoffs.

When you are in such an exclusive club, you cannot be asking the guy serving coffee whether there are cockroaches in the kitchen. Of course that would have been taken care off is it not? How can you ask? Its a privilege. Do you think people ask whether “Do Tatas have a good code of conduct for their executives”? NO. It is so obvious that we assume it should be there. So gross to ask!

Most big investors can be accused of incest – classmate, met him in BNI, IIM professor hai, xyz bank made an exclusive offer, this offer was only for doctors of our club. BULL-SHIT. Stay away from affinity clubs while investing. Affinity clubs are useful for your hobbies – photography, running, music….NOT FOR INVESTING.

…..more to follow…