Investors’ lack of critical thinking is costing them dearly

Two days ago, Elisabeth Holmes, the ‘new’ Steve Jobs, was sentenced to 11 years in prison and ordered to pay her investors hundreds of millions in compensation for deceiving the whole world about a miracle health-screening product. Two weeks ago, the world’s second-largest cryptocurrency platform, FTX, filed for bankruptcy. Two years ago, WireCard – an online payment platform described by Merkel as an “exemplary German company”, which had even come close to buying Deutsche Bank (Germany’s largest bank) – collapsed amid a scandal, involving even Russian spies, as revealed by the FT. A few years before that, following reports in the WSJ, it emerged that Bernie Madoff, the ‘renowned’ American investor, creator of the Nasdaq index and chief coordinator of the stock market, was running not an investment fund but the very definition of a Ponzi scheme. They all had one thing in common: amongst their main investors were large investment funds. The very ones that sell these products to you through their distribution channels.

21 November 2022 Reading time: 4.20 mins

Last Friday night, Spanish time, Elisabeth Holmes was informed of her 11-year prison sentence and the multi-million sum she was required to pay in compensation to her investors.

Most of my readers have probably never heard of this lady in their lives, but I am bringing up this case because I want to invite you to reflect on the degree of blind trust you place in the managers to whom you entrust the savings you have worked so hard to build up.

Less than ten years ago, Ms Holmes was regarded as the new Steve Jobs, but in the field of healthcare. She set up a company, Theranos, based in Silicon Valley, whose aim – which she claimed to have achieved – was to enable the detection of virtually any disease through a simple blood test.

Lured by the prospect of massive profits, fuelled by advertising, even former US presidents took part in the successive capital increases. And at one point, its board of directors included two former Secretaries of State: Schultz and Kissinger. Don’t tell me there aren’t plenty who’d love to have that for their own companies.

Mrs Holmes is a prime example of the ego that prevails in the world at large and of the stupidity found in the world of investment

It was all a scam orchestrated by a young woman in her thirties with an ego the size of the sky, in a world that has lost the ability to analyse the

Fundamentals – these are the factors that, in the long run, determine whether you make or lose money.

As my regular readers will know, my university degrees include Biochemistry and Molecular Biology. As I do not practise as a scientist, though my respect for science is absolute, I never express scientific opinions, but rather defer to those whose standing has been recognised by their peers. Unfortunately, I find that this makes me more the exception than the rule.

“Globalisation has brought many positive things, but some are so bad that nowadays any madman can become famous by publishing things that turn out not to be true”

The prestige enjoyed by scientific journals stems from something other than advertising. They enjoy this prestige because the content published in them has been thoroughly reviewed and validated by their peers – a term used to refer to other scientists who are specialists in the field. The more prestigious the journal, the more distinguished its peer reviewers are.

Well, as we have seen so clearly during the COVID pandemic, there is now the ‘pre-printer’ phenomenon: in other words, I write something and immediately publish it – on a platform created by Zuckerberg – before it has been verified, thereby creating an expectation that is, more often than not, false. This leads to analysts and fund managers, lacking the patience required in such situations, rushing to buy shares whilst they are still at favourable prices, thereby artificially inflating their value.

The fact that a private equity fund is involved is not only normal, it is natural, because that is its very nature. But for a private shareholder or another type of listed investment fund to be involved is an aberration in itself.

In my immediate family there are scientists of internationally recognised standing, and it’s rather galling that during the COVID pandemic they told me they were hearing about scientific ‘breakthroughs’ from me before they did through the usual channels. This was because my sources were stock market analysis channels, staffed by analysts who are brilliant with Excel but don’t know the difference between a prion and a macrophage (don’t worry if you don’t understand it either, but for a specialist it’s like not being able to tell the difference between bacon and speed).

“Warren Buffett, undoubtedly the most rational investor who has ever lived, repeatedly says: ‘Never invest in something you don’t understand’.”

And they don’t know this, because they couldn’t care less. But you do. They earn hefty commissions when their funds rise, but when they fall, it’s only you who lose money.

Cathie Wood, the new stock market guru and head of the ARK fund, has seen her portfolio lose 67 per cent of its value since mid-November last year, that is to say, over the past year – a figure amounting to around 50,000 million dollars. When I look at the composition of her portfolio, I constantly wonder whether, beyond the numbers, she actually understands the products of the companies in which she invests.

But then again, I’m sure he’ll come up with a ‘plausible’ explanation for a loss in value of almost 70 per cent, even though the person who has suffered that loss couldn’t care less about the plausibility of such an explanation.

But what I have described about the healthcare sector can be applied to any other sector; let us not think that it is limited to this extremely complex world.

I don’t know how many of you invest in cryptocurrencies, but I can assure you that most of those who do don’t have a deep understanding of blockchain technology, the foundation of cryptocurrencies; because if they did, they wouldn’t fail to realise that new cryptocurrencies spring up every day like rabbits in spring.

Money is nothing more and nothing less than an ‘intermediate medium of exchange’; that is to say, an easily divisible asset used to value a product or service, the value of which lies in the fact that a reputable and solvent institution – such as a central bank – provides it with what is known as ‘value of last resort’. In other words, the confidence that whoever prints that theoretical value on paper can honour it by issuing new paper of identical value.

“Cryptocurrencies are a right old scam, but the technology behind them is going to revolutionise the world as we know it”

For me – who is obviously neither a technician nor do I have an IQ of 170 – it took a year, and reading an enormous amount of material that I initially didn’t understand at all, to grasp the technology behind blockchain and cryptocurrencies. I came to the conclusion that, as well as being a disruptive technology, it is the future of many things: contracts, the flow of information and, of course, currencies – but not those issued by central banks. I firmly believe in this technology and invest in leading companies developing it, such as the classic IBM. But I’ll never in my life buy a single Bitcoin or any other cryptocurrency, because there’s nothing behind them, beyond an ideology.

My question is simple: how many fund managers have given the matter serious thought before rushing to invest in these ‘assets’? Holmes, the inspiration behind this column, is set to “serve a few years behind bars”, whilst Bankman-Fried, the founder of the FTX crypto platform which went bankrupt two weeks ago, will, as we shall see in the future, “enjoy” a few years of his own.

Just a little anecdote: this lad – he’s in his twenties – started his ‘scam’ in a WeWork office, another of those highly publicised cases of a stock market fraud.

“What happened with the FTX platform is yet another real scam within a scam born of ignorance”

You might think I’m an extremist, a pessimist or even a traitor to my colleagues. I’m none of those things; I’ve simply always been – and continue to be – responsible towards those who entrust me with their money. I would never advise a colleague on what they should do, but I will do so for any investor who asks me. And sometimes, even if they don’t ask. Someone who’s about to jump off a bridge doesn’t ask for your advice, but you give it to them anyway, because it’s your moral responsibility. Well, that’s the case here.

Investing involves many things, but blind trust is certainly not one of them. Life has taught me that mediocrity prevails in this world, and no profession is immune to it.

A few years ago, I failed to think critically and paid dearly for it. Faced with a serious ankle injury, I went ahead with an operation without really understanding my problem – because I didn’t even ask about it – performed by a ‘celebrity’ orthopaedic surgeon (who rubs shoulders with the King) who failed to identify my injury, meaning he ended up operating on something else entirely. I’m not joking – I had a dislocation of the peroneal tendons, yet he operated on my lateral collateral ligament. He made the incision on the opposite side of my foot, so far away from the injury that he couldn’t even come close to it, and to top it all off, he implanted—at the risk of rejection—a piece of cartilage from a cadaver. As I told him, “The mistake wasn’t yours; it was mine for choosing you.”

Blind trust is no good. And even if you think you don’t understand, you do understand. You must think critically, not to scrutinise the analyst – or, in my case, the doctor – but to understand what you’re investing in – in my case, my injury. If the fund manager or analyst is unable to explain, in a way you can understand, the reasoning behind that investment, do not invest. I’ll tell you why: they don’t know either. I didn’t ask, and look what happened to me.

And there’s no need to know either the fund manager or the analyst; everything is in the public domain. By law – and if it isn’t, so much the better for me. You don’t need to understand complex finance, such as discounted cash flows or rates of return; you need to understand what ultimately lies behind it all: the products the company manufactures and/or distributes. In other words, its business.

Humanity has survived the worst pandemic in its history thanks to the discovery of a vaccine in record time. I think everyone would agree on this. This new vaccine is based on a technology that is just as disruptive as blockchain, but in the world of healthcare: modified mRNA technology.

“The worst pandemic known before COVID – the Spanish flu – killed an unknown number of people. Without vaccines, the COVID pandemic would have wiped out half of humanity before it came to an end.”

Never before in history has a vaccine been developed that is so extremely effective (99 per cent and 97 per cent confidence intervals) and, above all, so easy to modify to adapt to mutations in the pathogen.

The technology is so disruptive that the ‘vaccine company’ – as Sanofi came to be known after acquiring the Pasteur Institute – having failed to master the technology, spent 3,000 million USD on a company called TranslateBio. Essentially, a small group of cronies who did have a handle on the technology – because they couldn’t afford to be left behind. The technology is set to revolutionise not only vaccines but also cancer treatments. And not in three decades’ time, but in three years’ time.

And, incidentally, my point is not a trivial one. Never in the history of humankind has any medicine been as thoroughly tested as the COVID vaccine. It has been administered more than 12,000 million times.

Well then, the two undisputed leaders in technology – and clearly the future – Moderna and BioNTech, are trading at rock-bottom prices. The reason for this is probably that the pharmaceutical analysts at the major investment funds know an awful lot about figures and very little, or perhaps nothing at all, about science.

Here are some thoughts from a humble fund manager. Don’t trust anyone. I don’t even have blind faith in myself, just in case I go completely mad one day. If you do have savings to invest, it’s because you’ve been clever enough to earn them, so you’re certainly capable of understanding where and why you’re investing them.