Office Hours is back this Friday 04/19 2-3pm EST. Subscribe to Epsilon Theory to check it out.

Investment Diligence and the Cornelius Effect

Earlier this week Ben wrote a note about the Curse of Some Talent. There is a related idea that comes with a story. This is one of my favorite stories. It recounts a seminal event from the earliest days of Saturday Night Live.

The inaugural cast was a gifted one. If, like me, you weren't there, it included John Belushi, Gilda Radner and Dan Aykroyd, among other generational talents. It also included Chevy Chase. His stint would be brief. After one full season in 1975 and a few episodes in the 1976 season, Chevy left the show. He claimed that he did so because his fiancée wasn’t willing to live in New York, which may have been true. The cast and many others, however, believed he left to quickly cash in on the platform and fame their young repertory company had provided him. He was a star, and they weren’t (yet). He was Chevy Chase, and they weren’t. And by all accounts, his behavior quickly started to reflect that belief.

And then, just as quickly, he was gone.


Want to continue reading this and the other 1,500+ essays you won't find anywhere else?




Already a subscriber? log in here

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.

Comments

  1. The search for the super-genius investor versus “stick to your process” (not the super-genius’ investment process, but one’s diligence process) perfectly explains if you (individual or firm) got it right about Madoff. Back in the '00s, I sat on the risk committee of a firm that considered including Bernie Madoff as one of our outside advisors.

    The pull was his impressive performance (all attributed to, let’s be honest, a belief in his super genius and overwhelming resume as his explanations of his process were just obfuscating blah, blah, blah) with the counter-pull being a series of red flags including a back-alley accounting firm, shaky record keeping and minimal-at-best controls.

    Our process - our “due diligence -” screamed “NO!” Our unspoken search for the super genius pushed us to find a way to “yes.” Fortunately, in this case (we got others wrong, just, luckily, not that spectacularly wrong), our process was competent enough, our fealty to our process was strong enough, that we said “no.” When it blew up, we all congratulated ourselves on a job well done, while also quietly breathing a sigh of relief that we fought off the pull of the super-genius cult.

    Not quite Rusty’s specific point - but definitely in the ballpark of building and always applying a thoughtful and experience-driven process versus abandoning it to an emotionally-driven quest for something (a super-genius investor) that blinds us to everything else. Of course, if we did go with our emotions, we’d never admit we were abandoning the process, we’d just find some cover reason - like “rogue operatives -” to get to the result we’d want despite our process.

  2. Avatar for rguinn rguinn says:

    Very much the thing which drove a lot of investors there, although parsing the genius-hunting vs. smooth return-seeking behaviors isn’t always clear.

    As an aside, I actually have a lot of grace for some of the funds and careers that were ended by very small - speculative - sized positions in Madoff. Absolutely amazing to think about how many <2% positions ended businesses.

  3. Avatar for robh robh says:

    Over the years I met with more than one of Madoff’s more sophisticated “institutional” investors who acknowledged that he was probably not doing what he said he was doing (the whole split-strike conversion thing never stood up to serious scrutiny, nor did his linear 1% per month returns) but thought that was simply a cover for a riskless front-running scheme on the Philadelphia Exchange (of which Madoff was a lead market-maker). They figured they could participate in the profits of the criminal enterprise, without any risk of consequences. Of course when I asked them if you assume the guy is a criminal what makes you so sure he won’t steal your money, they shrugged it off. Clearly ended up a case (for many of the larger sophisticated investors) of being out-raccooned.

  4. That’s great insight and proves, once again, that nothing is new and that past generations understood the world very well as shown by this old homily: If you lie down with dogs, you wake up with fleas.

  5. Avatar for rguinn rguinn says:

    And alas, that is a lesson that will be learned again and again. Whether it is criminal activity or simply unethical behavior, it is shockingly easy for LPs to justify the mental gymnastics of ‘It’s not me doing it’ or ‘I’m not a fiduciary for the people getting screwed’ responses.

  6. Pray thee tell Rob, what does it mean to be out-raccooned.

  7. Avatar for robh robh says:

    Hi Tim–looks like you are new to the pack so I’m going to hit you with some great pieces from Ben referencing one of his favorite movies—

    and The Spanish Prisoner - Epsilon Theory

    The crux is the old adage that “you can’t con an honest man”. Some of these investors thought Madoff was stealing “for” them, not “from” them and that they were the raccoons and not the marks.

Continue the discussion at the Epsilon Theory Forum

Participants

Avatar for rguinn Avatar for Mkahn22 Avatar for robh Avatar for Louis_Burge Avatar for Suwannee_Tim

The Latest From Epsilon Theory

DISCLOSURES

This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.