last weekend our very good family friend burt ross was on the cover of the wall street journal telling the story of how he lost the vast majority of his personal net worth with madoff. the graph from the article that struck me most was as follows:
"mr. ross says he remembers being puzzled about how mr. madoff was able to show positive returns, even in months when the stocks mr. madoff's fund owned were down. he pushed such thoughts aside "i thought, 'who am i to question?" mr. ross says. "this guy has a formula involving computerized trading... it's like coke. we're not supposed to know the formula"
over the last several months i have heard a lot of people who work around the tech industry saying things along the lines of 'at least we didn't cause this one' -- the implication being that this recent downturn was a housing/banking lead phenom. this is dead wrong, in fact, if anything i think technology and the marketing of technology is more to directly blame for this market crash than the 'correction' of 2001.
burt, who is a very smart and highly educated man, believed that 'computerized trading' could account for a gap which would otherwise be inexplicable, and he was is not alone. millions of people across an incredible range of financial products bought the marketing hype that the dawning of the digital age had fundamentally changed the nature of risk, finance, and investing...
why? because of the ipod, google, youtube, facebook, not to mention those incredibly appealing mac/pc ads. over the last 10 years the almost overnight impact of technology and the internet on american lives has been so tangibly profound that people were willing to believe that technology had also fundamentally changed the laws of finance and economics.
when investment performance, interest rates, mortgages, lending practices, all seemed simply impossible or out of balance with reality, the simple retort of 'technology has changed the rules' sufficed for due diligence. after all, if technology allowed facebook to scale from 0 to 50 mm users in 24 months, why couldn't new technology allow the efficient pooling of zero interest loans to people with no credit or income? in light of the visible delta consumer tech, the impossible seemed plausible to even sophisticated investors.
so - who is to blame for this crash? it is gates and balmer, jobs, the guy who wrote the mac commercials, serge and larry, maybe mark and dustin... because if they and many others hadn't pushed and marketed tangible consumer tech so far forward so quickly no one would have possibly bought the false promises of discontinuity via new 'computerized' financial technology. burt ross wouldn't have bought madoff's impossible 8% yoy returns, and we wouldn't need a reality check now.
fintech is a big deal - and tech is changing the financial landscape - but yet again we have learned to do our homework on the actual core impact, and never be afraid to call a bluff.