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The Chairman
Victor Niederhoffer

3/16/05
Don't Get Conned by The Most Admired Companies, by Victor Niederhoffer

A reader points to a study by Fortune that their most admired company showed returns three times greater than the market over the last five years.

It elicits the following thoughts:

I believe that Enron was on the list of most admired companies and that Fortune used to run an analysis of the stock performance of the most admired companies but stopped it when two of the top five went bankrupt. This is part of the much bigger problem where there is self-reporting of results and/or the related phenomenon of selective reporting of results of the goodies but not the baddies.

I disagree with the estimate of upward bias of about 10 percentage points a year for hedge fund results that Malkiel finds, and believe it to be much more like 15 percentage points. I look at hedge fund indexes for 2002 and find that they were up an average of 18 percent. Ha! As of 2005, sure. But not then. Same for all other years . The other related phenomenon of making high returns with little assets, and then losing big with big money subsequently, is part of the big con described by Maurer where the mark is part 5 of the invariable big con sequence.

1. Locating the well to do victim.
2. Gaining the victim's confidence.
3. Steering him to meet the inside man.
4. Mitting the inside man to show him how he can make a substantial profit dishonestly.
5. Allowing the victim to make a substantial profit.

The discerning reader will keep this list handy at all times and might even look at parts 6 to 10 of the necessary insignia of big con in Maurer's book. The beautiful thing about the way our industry has evolved into part 5, is that they don't even have to let the victim make a substantial profit. They can point to others that made substantial profits at the beginning of the fund.

And I must admit I play a unwitting role in one of the current big cons. People on the bulletin boards and the seminars can point to me as the amiable idiot who believes that selling volatility is always good, and is thus destined to go under over and over again. Thus, the appeal to the dishonesty of the mark. You can swindle Niederhoffer by buying volume.

A Savvy Fund-Manager adds:

By any "real world" measure, General Motors would have to qualify as a "best company" to work for. Thousands of idle worker workers draw substantial pay. The health and pension benefits are huge. The amount of actual work/thought required of employees, based on decades of my observations, is de minimus. The UAW famously, ferociously, effectively fights to make sure the most workers do the least work for the most pay. There's no shortage of vacation time, and northern Michigan is dotted with the second homes of well-compensated, leisure-rich GM employees. In many respects it is the epitome of a perfectly PC company. Paraphrasing Mae West, "Merit had nothing to do with it, dearie."

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