About the intelligent investor
The weekly column of ‘The Intelligent Investor’ by Jason Zweig, has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between the good advice and the one that just sounds good”
About Jason Zweig
One of the senior journalists of The Wall Street Journal. Author of the book “Your Money and Your Mind: How Neuroscience Can Help You Get Rich”, and the editor of the updated version of the bestseller “The Intelligent Investor”, described by Warren Buffett as “the best investment book ever written”
In the spectacular collapse of FTX, the crypto exchange, it seems that millions of fingers are already pointing the blame at Sam Bankman-Fried, the curly-haired prodigy who founded the company, brought it to a valuation of 32 billion dollars and then caused it to go bankrupt.
● “I have never seen a company in such a bad state”: the new CEO of FTX against the founder
● This is how the crypto house of cards collapsed – step by step
Bankman-Fried, or SBF for short, resigned as CEO on November 11, the day FTX filed for bankruptcy protection.
SBF may be at the heart of what went wrong, but it did not act alone. Behind it there is a whole ecosystem of fantasy and fakes; It’s called the investment business.
Hedge funds, venture capital firms and other professional investors can earn billions of dollars in fees thanks to their apparent ability to determine a company’s potential and the degree of integrity of its managers. But dozens of the world’s top investment firms, including Sequoia Capital, Singapore’s state-owned investment firm Temasek, Canada’s Ontario Provincial Teachers’ Pension Plan, Softbank Group, and hedge funds Third Point and Tiger Global, have all poured heaps of money into SBF.
The red flags were there, in droves
Despite their investment expertise, all of these companies missed many red flags flying over FTX. And rarely in financial history have there been more red flags than these.
We will mention and list them:
● When he was a guest on the financial “Odd Lots” podcast in April, Bankman-Fried didn’t even bother to fend off a question about whether a large part of his business might turn out to be a Ponzi scheme, and even noted that “it’s entirely plausible that a lot of crypto assets are worth nothing.”
● In a Nov. 17 bankruptcy filing, incoming CEO Ray said none of the financial statements of Alameda Research, the trading arm of FTX that is 90% owned by Bankman-Fried and is at the heart of the scandal, had been audited. FTX didn’t even own , according to him, an accurate list of all her bank accounts.
● During a Zoom interview to raise money from Sequoia Capital, the well-known venture capital firm, Bankman-Fried played hide and seek in a computer game. Later, in his profile commissioned by Sequoia, they bragged about this fact, considering “the very fact that he dared to play ‘League of Legends’ while asking people for hundreds of millions of dollars is proof that SBF is a brilliant man, and Sequoia should fund him.” .
● In July, Brett Harrison, then president of FTX’s US arm, tweeted that the company had consumer assets in bank accounts insured by the Federal Deposit Insurance Corporation (FDIC). After the regulatory agency announced that the tweets were “false and misleading”, Harrison apologized and deleted them.
Any potential institutional funder of FTX should discover such fundamental flaws through due diligence “even at the minimum possible level,” said David Salem, asset manager and research partner at New York-based Sparkline Capital.
A bull market and commission incentives make one believe in the supernatural
So how could so many smart people be so blind to such glaring red flags?
I tend to attribute the failure to what the English poet Samuel Taylor Coleridge called “the voluntary suspension of disbelief.” According to him, that “poetic trust” has the potential to turn the supernatural into something that “any person may believe in.” Every bull market creates a voluntary suspension of disbelief, but the huge commission incentives of the investment business make the supernatural normal.
But when you’re managing other people’s money, the only thing a bull market inflates faster than the capital you’re sitting on is your ego, and here you start believing you’re right about everything. In this frenzy of throwing money at crypto, has no one thought to stop and ask: even if we are right about it, is this the best way to make money?
How much it costs to turn your head from reality
Crypto may change the world, but the biggest beneficiaries may not come from within the crypto industry itself. Remember the frenzy surrounding Internet stocks in 1999-2000. Online commerce has indeed changed the world, but the biggest beneficiaries of the introduction of the Internet have generally been manufacturers and service providers in other industries. Most of the hot dot.com businesses from those days no longer exist at all.
Let’s go back to that “Odd Lots” podcast broadcast from April, where Bankman-Fried pondered aloud the way venture capitalists choose investments. It is worth quoting him in his own words:
“You have a weird fucking process that doesn’t look at all like the peak efficiency of its markets you would expect. [משקיעי הון סיכון] Hearing what their friends are talking about, and their friends keep talking about this company… and they start to feel a sense of FOMO [פחד להישאר מאחור] So they find a way in as well…
“And how do we justify that it is indeed a good investment? Like, all the models are invented… you estimate [חברות] According to a model built by a person who is the owner of the property being sold. So obviously the numbers will go up sometime between now and 2025, right? They will come up with some random figure. And that’s how you can justify anything.”
Because when there is no limit to how much money professional investors can get to do this, there is also no limit to the number of times they will turn their heads in a different direction from reality.