The name Alain Greenspan may not ring a bell to you, but I can assure you that the guy was pretty powerful.
He was the president of the Federal Reserve, the central banking system of the United States of America.
As you can imagine, this is not the kind of job that you can randomly land.
You need to be a great tactician, politician and have a strong understanding of economics and the investment world.
Theoretically, this person should have a “Master of the universe” understanding of investing and economics.
And still, this person managed to lose a lot of money with a wrong investment.
“C'mon! Everybody can lose money with the wrong investment, sometimes it’s just bad luck.”
But that investment was the pyramid scheme of Bernie Madoff, the most famous financial fraud of our time.
The funny thing was that Madoff didn’t promise stellar returns.
He promised the same returns of the US stock market (around 10%) but with much less risk.
You can see in the image how smooth the graph looks, and how easy seemed to make money, until it wasn't (Madoff returns are represented by the red line)
At the beginning of the Great Financial Crisis of 2007, all the gains evaporated, the scam was discovered and the value of the fund went straight to zero.
A lot of people were suspicious about Madoff's smooth returns, so how comes that one of the best financial minds of our times didn’t realize that it was a scam and lost a lot of money in the process?
Here is what Greenspan said about it:
In my own case, the decision to invest in the Rye fund (a feeder fund invested with Madoff) reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance.
To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations.
This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case.
Apart from the false modesty (you can’t be that ignorant in finance and be the head of the FED), the real problem of Greenspan was his laziness.
He blindly delegated his financial decision to an advisor, which turned out not to be trustworthy enough.
Do you have any way to avoid this fate and become a better investor than a FED previous chairman?
Yes, you do.
You need to take control over your investment decisions and make an investment strategy that will help you get what you want when you want.
Making a plan that clearly defines your life goals, and when you want to achieve them, figuring out how much money do you need for it and how to get the amount you don’t have yet.
This is an example of goal-based investing, the main principle we use in Simplinvest to help people creating their own financial plans.