In This Episode

Dan kicks off this episode of Stansberry Investor Hour by promising two rants – the first in the opening minutes, and the second one from diving into the mailbag.

First – a word on investing philosophy, and what investors need to prioritize. This topic is on Dan’s mind because of a tweet he recently saw that is now “burned into my brain.”

“When people are evaluating a fund, or manager, or even a public company, they prioritize in this order: performance, strategy used to get that performance, then the philosophy behind the strategy and only then do they wonder about the people behind that philosophy. But that’s the exact opposite of the way you should approach things in life.”

Extreme Value does its priorities in reverse order from most people’s – and Dan will tell you why.

He then introduces this week’s podcast guest, Diane Henriques. Diana is an award-winning financial journalist associated with The New York Times for more than 25 years, and author of A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History, released in September 2017. She is also the author of The Wizard of Lies: Bernie Madoff and the Death of Trust, a New York Times bestseller, and three other books on business history.

We think you’ll enjoy her chilling account of meeting and interviewing Bernie Madoff, a man who targeted not just strangers but even his own sister-in-law as victims of his $50 billion Ponzi scheme.

And a warning – after hearing Diana talk about the patterns of what she’s uncovered, you’ll understand why Ponzi schemes are actually very hard to spot, why they never seem to be “too good to be true” and why their masterminds automatically command respect, even deference, from watchdogs and regulators.

Featured Guests

Diana Henriques
Diana Henriques
Diana B. Henriques, an award-winning financial journalist associated with The New York Times for more than 25 years, is the author of A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History, released in September 2017. She is also the author of The Wizard of Lies: Bernie Madoff and the Death of Trust, a New York Times bestseller, and three other books on business history.

Episode Extras


1:15: Dan recites a Tweet he saw that’s now “burned into my brain” because of its pithy take on investor habits, and explains how getting a measure of the kind of people running a fund, company, or other investment is one of the first things he does when assessing a potential recommendation for Extreme Value.

8:11: Prioritize “people, then philosophy, then strategy, then performance,” Dan says, and he thinks you’ll make a lot better investing decisions – “and that is, after all, our mission.”

9:20: Levi’s, the jeans company, is plotting a second IPO, which it plans to raise hundreds of millions of dollars from, and turn these resources towards grabbing a hold in emerging markets. But as one retailer gets creative, another’s getting destroyed, as Payless shoes goes bankrupt… again. “Just endless destruction in the retail sector.”

13:08: Dan introduces this week’s podcast guest. Diana Henriques is an award-winning financial journalist associated with The New York Times for more than 25 years, and author of A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History, released in September 2017. She is also the author of The Wizard of Lies: Bernie Madoff and the Death of Trust, a New York Times bestseller, and three other books on business history.

15:30: Diana explains why Ponzi schemes are so stubbornly difficult to eradicate. “The only people who can run them are admired, trusted, respected figures.” 

21:49: Diane reveals the chilling connection between banking derivatives that helped bring down our economy, and the atmosphere that helped Bernie Madoff evade detection for so long. “Madoff’s victims, even though they were not investing in derivatives… the creation of these bank-sponsored derivatives tied to Bernie Madoff, pumped more money into his scheme, and kept that scheme going longer.”

25:58: Dan asks Diana what we could possibly do to reform derivatives, or global banking practices, to protect investors from Ponzi schemes. “Do you really think it’s possible that the government regulators of all people could get their arms around this in a meaningful way?”

31:22: Diane talks about the 1987 crash, and how the Brady Commission’s report to President Reagan following the Dow’s massive plunge pointed to a unified global market as the underlying factor. “We need a unified regulator for a unified global market.” 

36:40: Dan and Diana discuss how tantalizingly close authorities came to catching Madoff years before his worst crimes came to head, and why his betrayals went unnoticed even after SEC scrutiny. “We have mistaken images of Ponzi schemes in our heads.”

39:34: Diana recounts her interview with Madoff in prison, where she asked him how he could endure the near-certainty that he would be arrested, sooner or later, for years at a time. “This was a guy with absolute ice water in his veins.”

52:15: Dan answers a question from the mailbag from Jeff R., who asks whether price-charting strategy is a waste of time. Dan explains the difference between using the past as legitimate tea leaves, and the trader term “naïve technical analysis.”


  • To follow Dan’s most recent work at Extreme Value, click here
  • To check out Diane’s book The Wizard of Lies: Bernie Madoff and the Death of Trust, click here.


Announcer: Broadcasting from Baltimore, Maryland all around the world, you're listening to the Stansberry Investor Hour.

[Music plays]

Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at Here is your host, Dan Ferris.

Dan Ferris: Hello and welcome, everyone, to another episode of the Stansberry Investor Hour. I am your host, Dan Ferris. I'm the editor of Extreme Value, which is a value investing service published by Stansberry Research. All right. We have a really good show lined up with a great guest for you today so let's get into it.

Okay. Today's rant is actually going to be a little shorter than normal. However, I have a special two-for-one deal. You're going to get a second rant – a short one also – later in the program, around the time when I do the mailbag. So, the first rant I'm going to call Prioritizing People and Philosophy. Yes, it sounds very highbrow but it's not. I promise.

So, a couple of weeks ago on episode 88 of the podcast, we interviewed Grant Williams from Real Vision TV, and from just hanging around the financial markets for decades and doing lots of cool stuff too. And we got a lot of great feedback about that episode. If you haven't listened to it, definitely tune in. Grant has interviewed people who – like Anthony Deden who never – Deden never did an interview before that. And I'd love to have him on the show but it wouldn't surprise me if he never did one after it.

So, during that discussion with Grant Williams, I was reminded of a Twitter post whose author unfortunately I've not been able to track down. So for now – I'm sorry – it's still anonymous. But when I find out who it is I'm going tocredit them. And the Twitter post was brilliant I thought, and I've thought about it and thought about it. And I'm going to talk about it as often as I think is necessary. Including right now.

So the Twitter poster said: when people are evaluating a fund or a manager, an investment manager or a mutual fund or hedge fund or something, or even a public company that they're thinking about buying for their portfolio, they tend to prioritize in this order. They'll prioritize performance – usually recent performance; then the strategy used to get that performance; then the philosophy behind the strategy; and only then do they start wondering about the people behind the philosophy or the strategy or the performance [laughing].

And the Twitter post burned itself in my brain because the person said, "You know something? It's exactly the opposite in real life of what you should do. What you should do is first get to know the people, the people allocating your capital in whatever form. Get to know the people. Get to know their philosophy of life really, and investing too. Then get to know the strategy they're using that you're proposing to put money into with them. And then evaluate whatever performance information they can give you." And I mentioned a moment ago Anthony Deden of Edelweiss Holdings, who Grant Williams discussed a couple podcasts ago.

And if you go to Edelweiss Holdings' website, you will find information about the philosophy, and to an extent also the strategy, and a little bit about the performance. And less about the people because – there's some information about the people. There is some information. But Deden is a very humble kind of a guy. And I think that's a decent example of just a place to go where these things are prioritized just about right. So that's the rant. That's really the core of it. And I don't wanna go on too long about this because it might dilute the message.

When you're looking to put your money with someone or buy someone's research or really – and the most important thing is: when you're looking at someone to allocate your capital, whether it's a hedge fund guy, or even if you got some program with a broker who's going to allocate your capital or anything like that, a public company – you know, you put your money in Berkshire Hathaway, you wanna know something about Warren Buffett, right? Any of these cases, anybody who's going toallocate your capital, get to know the person. Forget about their recent performance. Prioritize that last. Prioritize finding "Who the heck is this person?" first.

And if you read my newsletter, Extreme Value, this idea has kind of gotten into my head and won't go away. So the first thing I tend to talk about when we wrote about – well, I don't like to give away picks because people pay a lot of money for the newsletter. But the companies that we've written about recently, I've tried very hard to dig into the person's past, the main capital allocator's past, and learn something. And share something important about the person. What did they do before they were – how did they grow up? What did they do before they were allocating capital? Where'd they go to school? How'd they get the idea to be in this particular business? Et cetera, et cetera. And then of course, then after you know that stuff, then think about their philosophy of investing. Not what they're doing with your money but why they're doing it.

There's a guy on YouTube. His name is Simon Sinek – S-I-N-E-K. And he's got a great presentation – and if you just go on YouTube and type "Simon Sinek," this is the presentation that comes up first. I don't know what it's called but it doesn't matter. You'll find it if you just type his name on YouTube. And he's got this great presentation that speaks to the prioritization of philosophy over these other things. And he talks about marketing. And he says most people say, "We have this product. It's really great. Why don't you buy it?" And Simon says, "No, no, no. That's not how really great products and companies operate."

And he uses the example of Apple and how they – before you know the product, they always seem to wanna tell you why they're doing what they do. And, again, once you know why, which is kind of a philosophical question, it tells you more about the people. It tells you more about who you're dealing with. And of course, with Apple, they had this legendary guy, Steve Jobs, who founded the company and gave birth to the philosophy of insanely great products and insanely great customer experience, et cetera.

Okay. So then after you know about the people and the philosophy, then what do you do? Well, then you wanna know about the strategy. So if you've learned enough about me and my philosophy of investing, then you say, "Well, what is this newsletter Dan writes?" It's Extreme Value. It's value investing. And you say, "Whoa. Value investing hasn't done so well over the last few years. Yeah. But Dan's done okay." So that's strategy and performance. You're actually deprioritizing strategy and performance compared to people and philosophy. And do this when you look at every public company that you might choose to invest in or any situation where you're putting capital to work with somebody else in charge.

I'm going to leave it there, okay? Shorter-than-normal rant. I'm going to leave it there. Prioritize people, then philosophy, then strategy, then performance. And I think you'll make a lot better investing decisions. And that, after all, is our mission: we're trying to help you become better investors here. All right. That is this week's rant. Write into [email protected]. Tell us what you think.

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Let's get on with some news items right now. Just a few. And it's an interesting thing. Actually our producer, Justin, gave me these news items this week, as he does most weeks. And I looked through them and I prioritize them and I thought: you know something? There's news about the beginning of corporate life and there's news about the beginning of corporate life and there's news about the creative destruction and political events ending some corporate lives.

And the beginning of corporate life for Levi's as a public company is coming up. Levi's, the jeans people, the clothing company, has filed the initial paperwork for an initial public offering. For the second time. They were public and they went private back in 1985. And they're planning to use the money from the IPO to seize opportunities where? Where else? In emerging markets like Brazil and China. And they think they're going to raise between $600 and $800 million with the entire company valued at around $5 billion. And I'll be real curious to get a look at the financials of Levi's. Because you wonder how – we're living in a time of creative destruction of a lot of retailers and even some brands and things. It's a difficult time and I'm curious to know how they've done the last several years and what it looks like from the inside out.

And of course I said some of the news is also about the end of the corporate life cycle. And yet another retailer has bitten the dust. Payless shoes files for bankruptcy for the second time in two years. I think they call that Chapter 22, their second Chapter 11? And they're closing all 2,100 Payless shoe stores. So no more Payless shoes.

And when you look at it – I have a list here of all these retailers who've filed over the past few years. David's Bridal, Performance Bicycle, Sears, Mattress Firm, Samuels Jewelers, National Stores, Brookstone, Heritage Home Group, Rockport. I have Rockports on my feet right now. Nine West, Claire's Stores, Bon-Ton, Charming Charlie, Toys "R" Us, Aerosoles, Perfumania, True Religion, Gymboree, Rue21, Payless the first time around, Gordmans, Gander Mountain, hhgregg, Radio Shack, et cetera, et cetera, et cetera. American Apparel. They're just endless. Endless destruction in the retail sector. So it's really hard to pick a retailer to buy these days. And I've tried to avoid doing so [laughing] as an investor. 

Also in the general category of stuff related to the end of corporate life – now, Honda Motors is not coming to the end of its life. However, their one and only plant in the United Kingdom will come to the end of its life in 2021. And of course as soon as I say this, what's the first thought on your mind? Well, Brexit, right? Nope. Honda says it has nothing to do with Brexit. I just find that a little bit difficult to believe.

Now, if Brexit happens, which I think it's less likely than any time since the vote to leave the European Union happened a couple years ago – just far less likely. The news is kind of winding back around that way. But if it does, it'll be pretty bad for a lot of folks in the UK who depend on that relationship with the continent, with Continental Europe and the rest of the EU. They're going to lose 3,500 jobs at their one and only UK plan. Closing down in 2021. Huh. So, beginning of – there's IPO; there's bankruptcy; there's closing plants. And the corporate life cycle goes on and on and on.

Okay. It's time to get to our guest, Diana Henriques.

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Okay. It's time for this week's guest. And I really can't wait to get to this conversation because it ties right in with my opening rant for this episode. And you'll see what I mean. So our guest is Diana B. Henriques is an award-winning financial journalist associated with The New York Times for more than 25 years. And she's the author of A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History, released in September 2017. She is also the author of The Wizard of Lies: Bernie Madoff and the Death of Trust, a New York Times bestseller, and she's written three other books on business history.

Over her intrepid career as an investigative journalist, Ms. Henriques has covered and uncovered some of the greatest scandals of U.S. financial history, starting with the Abscam political corruption probe of the 1970s and continuing through the Enron bankruptcy in 2002. In 2005 she was a Pulitzer finalist for a series of articles exposing the financial exploitation of young soldiers by insurance and investment companies, work that also won her a George Polk Award and Harvard's Goldsmith Prize for Investigative Reporting. Wow. She became a Pulitzer finalist again as a member of The New York Times team covering the U.S. financial crisis of 2008. Wow, wow, double wow. Please welcome Diana Henriques. Welcome, Diana.

Diana Henriques: Thank you so much and thank you for that very kind introduction. It pays to have very talented colleagues, and I always have at the Times.

Dan Ferris: Wow. You know, I don't know why I'm not more familiar with your work. I can't wait to finish this book. I've started The Wizard of Lies and it's really good. It reads almost like – it's like a really detailed novel. And it's very exciting stuff.

Diana Henriques: Well, I'm sure all of Madoff's victims wish it had been fiction. But unfortunately for them, and really for all of us, it's all too true. Because the problem of Ponzi schemes, as you know, Dan: it's stubbornly difficult to eradicate these crimes of trust, as I call them. And they remain a perpetual risk for investors.

Dan Ferris: Yeah. It's really hard to figure this out before it gets going. You can't prevent these things. You can discover them and prosecute them. But you really can't prevent them, can you?

Diana Henriques: It's challenging. Now, one of the more frustrating aspects of the Madoff case of course was that regulators did attempt to investigate him three times. And botched every effort; in some cases through lack of resources, in some cases through lack of experience, and in every case through a lack of imagination. They just could not imagine that this admired, trusted, respected Wall Street figure could possibly be a crook.

But that's the insidious things about Ponzi schemes: the only people who can run them are admired, trusted, respected figures. Some shifty guy in a cheap suit is never going to lure you into a Ponzi scheme. Only admirable, trustworthy people can do that. And that's what makes it so hard to prevent them. I think there are some self-help steps that investors can do, and I think there were some regulatory efforts that could've been made, still could be made, that would protect us to some degree. But they are difficult crimes.

Dan Ferris: Yeah. One of the points you made in your book was the sort of – well, you made it implicitly over and over again: the reputation versus red flags. There were all these red flags all the time and they came so close to catching him a couple of times and balked because ultimately there would be some SEC report or something, or in the FBI or someplace, where they'd say, "Well, we just can't believe that a guy of his reputation would do this. Blah blah blah"

Diana Henriques: Yeah. And it's hard to fault people for trusting someone like Bernie Madoff. Scientists will tell you that human beings are kinda hardwired to trust each other. And I can see, from an evolutionary standpoint, how that would've been really important when you're putting together the hunting team to go out after the woolly mammoth – it really helps if they trust each other to fairly share the kill. But the fact that our default position is to trust one another – especially people who look and sound a lot like ourselves – that leaves us potentially vulnerable to the sociopaths who will use that to rip us off. It's always a risk.

But the alternative is not: "Don't trust anybody." That's what's so difficult. We can't just say, "Trust no one," or modern commerce comes to a halt and modern banking comes to a halt, and what a hideous society that would be to live in anyway. So it's important that we figure out a way that we can sustain the trust that's necessary. One of the ways that investors can do that is to simply ensure that the investor managers they use, the investment advisors they use, maintain their account with an independent third-party custodian. It's kind of a complicated measure but an independent third-party custodian is almost no-fail insurance against a Ponzi scheme. It's a good practice to just be sure as an individual you're doing that.

And then from the regulatory standpoint, I frankly think regulators need to be a lot tougher on banks as our first line of defense against Ponzi schemes. Because, as you could see from Wizard of Lies, if Bernie Madoff hadn't had a bank account, he would not have been able to do what he did. Every Ponzi schemer has to have a bank account. And uses that bank account in pursuit of his crimes. So the banking business could be an early warning line of defense, as you were saying earlier, to stop these crimes instead of to pick up the pieces after they've been exposed. Well, bankers are in a position to do that and you and I may not be. So I would like to see much more made of the bank regulatory process as a tool against Ponzi schemes.

Dan Ferris: Yeah. You know, you raise an interesting point because at one point in the story, all these huge banks – JPMorgan Chase, HSBC, Citibank, Fortis, Merrill Lynch – they were actually offering Madoff-linked derivatives, derivatives linked to Bernie Madoff's phony performance. So I don't know. I don't know, Diana. Should I really trust these people?

Diana Henriques: That's one of the reasons that some of those banks paid substantial civil penalties in the aftermath of the Madoff case. But that demonstrates a little bit of what I was also getting at with my book on the 1987 crash, Dan, and that is how financially complicated and interconnected our financial lives are today. You may think that you don't have anything to do with derivatives, okay? "Derivatives – I don't invest in 'em. I don't have anything to do with 'em." And yet Madoff's victims, even though they were not investing in derivatives – the creation of these bank-sponsored derivatives tied to Bernie Madoff helped pump more money into his scheme and helped keep that scheme going longer. So, in effect, they did have a stake in how derivates worked. They just didn't know it.

So the modern world makes it very difficult for you to understand what fault lines you're standing on, if you know what I mean. You may think, "Oh, I don't have anything to do with that" or "I'm avoiding those risks." But if you're put into an overall financial system that is vulnerable to those risks, as we were in 1987, then you're going to feel the impact of them even if you did not voluntarily take that risk on.

Dan Ferris: You know, that's a great point. And I've only dipped into the book, First-Class Catastrophe, that you mentioned, about the '87 crash. But the point that I did glean from it is what you just said: that was the first modern crash. And I never looked at it this way before I read a little bit of your book. That was the first modern crash where we learned about this thing that we've come to know very well called systemic risk, and how it's all tied together and you light a match at one end and it explodes at the other. And that is now the world we live in. Every event since then has been –

Diana Henriques: It is now. I mean, as I say in the book, it was unlike any previous crash. And every subsequent crash has been like it. It was the first of the subsequent ones. And what made it so unique in contrast to the previous ones was just as you said: it wasn't a crash in one market. It was a crash that affected every market, every regulator. Even markets all around the world. So this was a novel experience for us to find that the storm didn't just hit in one little place. I mean, you may have a commodity bust or we have a stock market crash or we have a real estate crash or we have a banking crisis. But in '87 we had all of those things. They were all connected with one another: real estate because bonds were being sold, financed by real estate; mortgage-backed securities were a brand-new thing. So it opened the door to us but it actually showed us, Dan, really changes that had already occurred that we weren't aware of.

It wasn't like everything just happened overnight and then we had the crash. These were changes that had been developing since the late '70s into the early '90s. The advent of these gigantic pension funds as stock market investors; the advent of derivatives that tied the cash market for stocks to the derivatives markets in Chicago; the advent of automation, which radically speeded up the pace at which trading could occur and the kind of trading that could occur. I mean, the granddaddy of all the algorithms we see in the stock market today arose in the very few years right before the '87 crash. And you had this balkanized, fragmented regulatory system where each regulator is kinda regulating his part of the elephant, you know? "I regulate the knee. You regulate the ear." And nobody really had authority and visibility for the market as a whole.

So we almost destroyed our financial system on Black Monday, '87. But we haven't done a lot to fix those problems since then. We've been kind of going on a wing and a prayer until 2008, which should've been a real serious wake-up call that we had to fix some of these problems. Some of them were addressed, not all of them very well. Some of them still haven't been addressed, which is why I still kind of bang on the table that we need to learn more from Black Monday than we have.

Dan Ferris: Diana, what could we possibly do? This financial system – this global financial system that we live in that you point out is so interconnected through so many different instruments and so many trading venues. Do you really think it's possible – I mean, do you really think that the government of all people, regulators, could really get their arms around it in a meaningful way?

Diana Henriques: Well, I think there's certainly some steps that could be done to make us less vulnerable. Markets are going to fluctuate. There's no doubt about that. I'm not concerned in the '87 book about whether the market falls. I'm concerned about whether it falls apart. And markets that fall apart is what we need to guard against, not just markets that go up and down in terms of prices. One thing that we could do is have better international coordination and harmonization. That would help. And we've neglected that tremendously in recent years.

A second thing that we could do is have unified federal regulation instead of having it split among six different agencies and 50 stage securities regulators, insurance regulators, and banking regulators. Unlike virtually every other modern economy in the world, we do not have a unified financial regulator plus a central bank. We have a central bank, the Federal Reserve, and then we've got this whole village of different regulators regulating their little piece of the market.

We can fix that through legislation. That wasn't handed down on tablets of stone. We can change that. It would take a lot more bipartisan cooperation than we've been seeing lately, and hopefully it won't take another desperate financial crisis to push us in that direction. But that is something that would make our markets less vulnerable: if you had centralized visibility and centralized authority to act, regardless of which corner of the market the fire broke out in. So that's another thing that would help.

And a third thing that would help would be a lot more visibility into the kinda financial engineering that increasingly drives our financial engines. More visibility into the kinds of derivatives that're being developed, the kinds of swaps, the kinds of _____ instruments that giant institutions are trading back and forth, the kind of algorithms that they're using. We need regulators who are equipped by their training to understand those factors, and they need to have visibility into what's happening. And, again, that doesn't take a constitutional amendment. It just takes a change in how we regulate these increasingly interconnected, and I think increasingly fragile marketplaces.

Dan Ferris: Diana, it sounds like you're saying, "If we only had more centralized federal national kinda regulation," and I'm having trouble calling to mind a country in which that exists that doesn't have a really kind of sclerotic economy, especially lately. Is there a model for this – in other words, is there a model for this type of centralized regulation that you think we need?

Diana Henriques: Well, the Japanese market has long had the Bank of Japan, central bank, and the financial ministry. It regulates its markets through a centralized agency. The UK has struggled. It has the Chancellor of the Exchequer of course, the Bank of England as its central bank, rather. And it has created and recreated a centralized enforcement agency over the years. But it is typically not the model that you would have one regulator for your derivatives markets, two or three regulators for your banking system in addition to the Fed, and a regulator for your stocks and options market that's different from the regulator for your commodities derivatives markets. That breakdown among all of that complex machinery very nearly was fatal in 1987.

Now, one way it could be accomplished of course is better coordination, and that's what federal officials have relied on since '87: trying to coordinate better among all of these moving parts. But we've got a regulatory system designed for a different era, Dan, an era when markets were more discrete, where commodities typically traded among themselves. The people trading commodities were not trading stocks. The people trading stocks generally were not trading real estate or bonds. But that's not true anymore and it hasn't been true for decades.

We have a unified marketplace. As you know, that was the primary finding of the Brady Commission blue-ribbon report on the 1987 crash, a report that was given to President Reagan. And that is that we have a unified market but we're still regulating it as if it were a fragmented market. We need to have a unified regulator for a unified market just to recognize reality. If there's a way to achieve that through better coordination and cooperation among individual regulators, then great. But then you're kinda relying on the personalities of the folks at the helm when the next crisis hits. So I think we need to kind of think in some fresh ways about how we regulate the modern world.

As you know, 90% of the daily trading on any given day is done by algorithms but not human decision-making. The human decision-making was over when the software was written. From then on, it's an automatic response to changes in market direction or market volume. So if we're going to regulate a market that's 90% automated as if it were still the market of the 1950s where it was 100% human-driven, we're going to get into trouble. And I'm just trying to make people aware of that and get people thinking about ways that we can avoid the consequences of that.

Dan Ferris: Okay, Diana. I'm going to talk about three little episodes that were in the HBO film of your book, Wizard of Lies, starring Robert De Niro and Michelle Pfeiffer, which I kind of enjoyed watching recently.

Diana Henriques: Great. That was great fun for me, by the way.

Dan Ferris: Yeah. I noticed. You got to do scenes with Robert De Niro. That must've been a lot of fun.

Diana Henriques: Yeah. You know, I thought I would just retire at the top after I finished that film [laughing]. I make my film debut opposite Robert De Niro and it just doesn't get any better than that.

Dan Ferris: So, anyway, there are three episodes in the book and in the movie that kind of caught my eye. And they speak to a little bit of why these things happen and why I'm skeptical about regulatory responses. And they're not in chronological order. The first episode was: when Madoff was sentenced to 150 years in prison with no hope of parole, the judge said something like, "I'm going to make an example of you." And I thought: well, you can make an example of him all you want to but the fact is: there was a Bernie Madoff somewhere before him and there'll be another one after him and you can't prevent that guy from coming into existence. Maybe you can stop him sooner but you can only make an example up to a certain point.

The second episode – and this is one of the things I learned from your book that I did not know previously: there was a moment when the SEC could've found this thing out in 2005 simply by asking what securities or how much in securities were being held in his depository trust account. And he gave them the number and they balked. They called up and they actually confirmed the existence of the account, and all they had to do was ask one more little question, and they didn't do it, and they would've found out that there was just not enough in there to run the giant business he claimed to be running.

And the second – the third thing, I'm sorry, was just a little side thing I noticed in the film where they're at a party a month or two before it all blows up in December, 2008, so it was maybe in the November, October or something, and Ruth and Bernie are at a party and Ruth says, "Oh, my sister wants to give us all her money," something like that, and Bernie just very offhandedly, knowing it's all falling apart, just says, "Yeah, sure, no problem." And you can imagine of course: "This is my sister so of course I trust her husband. He's a well-known guy."

And when I put these three things together, I think it's gonna be really hard to ever catch somebody until after they've started doing this. It's going to be really hard to train people – to get people to the point where a low-level government guy really cares enough to follow through all the way. And I think that sloppiness – I'm just afraid that that sloppiness where they didn't look into the DTC account – it's too much a part of human nature.

Diana Henriques: I agree with you at how frustrating it is. I mean, I likened it to kind of watching the Titanic head for the iceberg; watching these SEC investigations unfold, you keep wanting to say, "No, no, steer. Make that phone call. Check those assets." But I think if you look at the personnel, the level of training, the level of experience, and the mistaken stereotypes that regulators had about Ponzi schemes, you begin to understand why they didn't make that extra call, make that extra step, do that extra effort. They – and to some extent we – had a mistaken image of Ponzi schemes. We think they're always going to involve pie-in-the-sky overnight riches. That's one of the red flags, right? "If it sounds too good to be true it probably is."

Well, a very smart fraud analyst named Pat Huddleston after the Madoff case rewrote that. He said, "If it sounds too good to be true, you're dealing with an amateur." Most Ponzi schemers, like Madoff, know that if they want the big money, if they want the smart money, they can't make it sound too good to be true. Because these guys'll see right through it. They've got to make it sound good enough to be attractive among all the other options for investment that an affluent person has but never too good to be true so that it would ring their alarm bells. And Bernie had that down to a science. He knew just how much to offer.

In the early part of 2008 before this all started to fall apart, Bernie was paying 4%. Nothing screams Ponzi scheme about a 4% return. So in part, as I say, it was a failure of imagination, but also mistaken impressions about what a Ponzi scheme, a modern Ponzi scheme, is going to look like. It's not going to be run by some flashy bon vivant who's insisting you invest right this minute and offers you 50% a month. It's going to be run by a nice low-key guy like Robert De Niro. It's going to be run by somebody who's going to make it just sound attractive enough. And that's going to disarm not only investors' alarm bells but regulators' alarm bells as well. This is not to excuse the SEC but just to point out that they were prone to some of the very same misperceptions about Ponzi schemes that the rest of us are.

On the DTC account, that was one of the most chilling experiences that Bernie talked with me about when I interviewed him in prison. Because I was trying to imagine what it's like: you had this number – is it happened – they didn't make that clear in the film, but in real life, what happened was: it was Friday afternoon and he had given the SEC investigators the DTC account number expecting that they would call and find out that there was nowhere near enough assets in his DTC account to support the amount of money he was supposedly managing. He spent that quiet weekend waiting to be arrested, fully expecting they would make that call, the jig would be up, he would be done.

And I asked him – I said, "How did you endure that?" And all he could tell me was, "Well, you compartmentalize." But this is a guy with absolute ice water in his veins. I mean, he coolly and calmly sat there and waited to be arrested. And this was years before the fraud scheme finally fell apart. So he had a sort of fatalistic resignation about how it was ultimately going to come down, and just kept forging ahead.

The episode with Ruth's sister's asset – it is in fact true that Ruth's sister and brother-in-law lost virtually all of their assets with Bernie. They were all invested with Bernie and they all disappeared. And to their credit, they nevertheless stood by Ruth throughout the years that followed Bernie's arrest, and were a significant source of support for her in those very difficult days. And the way HBO handled it made it perhaps seem a little bit more offhand than it had been. What they were I think trying to show there was the fact that Madoff did knowingly expose his entire extended family to ruin in this Ponzi scheme. I mean, he did that. Peter, his brother, his sons, their children, Ruth's extended family – they all invested with him. So he had to know that when this fraud came crashing down, it was going to hurt all of these people.

And when I pressed him on that in these prison interviews, the best I could get from him was the he was certain that before it collapsed, he'd be able to quote "take care of them," that somehow whatever – he'd get out with enough cash left that he could secure some kind of support for those nearest and dearest to him. And in fact that's what he tried to do. In his ignorance of the bankruptcy laws, at the time the fraud collapsed, he still had about $350, $400 million in the bank, not a small sum, and he was frantically writing checks on that money to long-time employees, to members of his family, trying to spend the last of the money he had to secure their futures.

Now, the bankruptcy laws don't work that way. Every one of those checks was going to be canceled the minute he filed for bankruptcy. He couldn't've known that. But I think in his mind he felt that he would be able at the end to protect the dear ones that he was hurting. Now, it's not logical but there's nothing logical about running a Ponzi scheme.

Dan Ferris: No. That was one of my favorite scenes in the film: when you pressing him on that and he just couldn't – I realize it wasn't Bernie; it was Robert De Niro. But I thought he did a great job of being a very cold-as-ice customer. And he came up with nothing remotely like an answer you would expect from a guy who was smart enough to engineer all this and keep it going for decades. It was just a point of great failure and stupidity I think in his mind. But you don't go into this I guess if you've got all your marbles anyway.

You know, Diana, I wanna read one sentence from your book, which is in fact the last sentence. Because I've been looking for a lesson from all this and, as you can see, I'm struggling with the idea regulation, and can we really protect people? And I started out the podcast today talking about the importance of getting to know people who allocate capital. But the last sentence in your book I think is really the great lesson. And you say, "That is the most enduring lesson of the Madoff scandal: in a world full of lies, the most dangerous ones are the ones we tell ourselves." And you referred a few minutes ago to how we're kind of hardwired to trust each other. And as soon as you said that, I thought: we're hardwired for a lot of things; very few of those things – none of those things make us good investors.

Diana Henriques: Well, I am touched that you noticed that line. I use it frequently as the core of the Madoff lesson. We have to be honest with ourselves about our own failings. Well, they're not even really failings. We have to be honest with ourselves about what we're like. We're hardwired to trust each other, which means we're not going to see the con man coming. And to tell ourselves that we will is just to lie to ourselves, to say, "Oh, I'll never fall for a scheme like that." You're just lying to yourself. Of course you can. You're no more special than the 10,000 people who got caught in the Madoff scandal or the hundreds of thousands of people who get caught in Ponzi schemes every year. On average a new Ponzi scheme surfaces every five days. So there's nothing special about you that you're going to be immune to the Ponzi scheme.

So be honest with yourself about that and make sure that when you trust someone you also take steps to verify the financial arrangements you make with them. Because you recognize that your trust is going to blind you to the red flags that you would otherwise see. So I think if we're honest about our own limitations – and you know in reality these are lovely limitations. The fact that we trust each other is what makes happy homes and healthy communities and a coherent nation. Mutual trust is not something we wanna get rid of. But we do need to recognize that it leaves us vulnerable. When we trust too much or unwisely, it leaves us vulnerable. So we need to be careful to verify the financial arrangements we make even though we trust the people we're dealing with.

Dan Ferris: Diana, I cannot think of a better place to leave us. We are out of time, and that is exactly the message that I wanna leave our listeners with. Thank you so much for being here, Diana. When you finally do win a Pulitzer – you've been a finalist twice – maybe we'll have you back on the program if you're not too famous for us then.

Diana Henriques: [Laughs]. Thank you for having me. I've loved the conversation.

Dan Ferris: All right. Wow. What a great guest, huh? Listen, I definitely – I'm halfway through it and I'm going to finish it real soon, but I recommend reading this book, The Wizard of Lies: Bernie Madoff and the Death of Trust, by our guest, Diana Henriques. It is quite excellent. The reporting and the research and the detail in the storytelling – and, frankly, the storytelling itself – are excellent. And, by the way, Diana is going to speak at our annual Stansberry Conference that we hold every year in Las Vegas and I hope you'll come out and join us and listen to her. Because I know – obviously she's a very insightful woman. I mean, she's just about darn near Pulitzer-Prize-winning stuff. She's been around a long time, covered a lot of stuff. Wow. Great guest. Great book. And I'm sure she's going to do a great speech for us in Vegas.

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So, remember, folks, your feedback is important to the success of our show. And if you have questions, comments, whatever, just e-mail us at [email protected]. We read them all. We try to respond to as many as possible.

Now, in the days of Porter and Buck, they used to say, "We read all the e-mails and try to respond to every single one, even the hurtful ones." Well, guess what? This is the second rant I promised you. And it is called: Civility Is No Longer Optional. Look, I'm 57 years old. I've done well in life. I don't need to put up with nothing. So if you're going to call me a fraud and if you're going to be uncivil and if you're going to call me – another guy called me this week a pompous killjoy. And the guy who called me a fraud is a complete idiot. He doesn't understand basic ABCs of reading financial statements and the difference between an index and an individual – I mean, it's just ridiculous.

But if you're going to call me a fraud and if you're going to behave in an uncivil manner in the e-mails, I'm just going to ignore your presence forever. As soon as you're uncivil, I'm going to stop reading the e-mail and move onto the next one and ignore you. So I'm not even – when they used to say, "even the hurtful ones," well, that was Porter and Bucks' thing. That's not my thing. I don't need to put up with it.

Because I'll tell you what: the mailbag here is a civil conversation between you and I, the listener and me, about: how can we become a better investor? And, to a certain extent, "What does Dan think?" And that's all it is. It's just a civil conversation about investing. Now, if you have a criticism of something that you think I haven't done well, be like Peter G. Remember I mentioned Peter G. last week. And I said he was a model correspondent. He corresponds often. He's sometimes highly critical of things that he thinks I failed to do. But he's never uncivil, okay? So be more like him if you wanna write in and criticize. And, to be fair, most people aren't like this. Ninety-five percent of folks are not uncivil. But enough of them are that I felt like I needed a rant on civility. You get the picture. Civility is no longer optional in the mailbag.

So, moving on to mailbag question number one – and I have five of them today. I like to do more than one or two. It says, "Good day, Dan. I will keep this short." Thank you. Thank you. Russ S. is writing in and I'm thanking him for keeping it short. He says, "I'm a new listener and long-time True Wealth subscriber and enjoyed the show. I think you are doing a fine job. This concerns the most recent episode." This would be the last episode with Dr. Richard Smith as guest. "On your rant with stock buybacks, what about the practice of using debt to fund the buybacks? Is that a sound business practice, especially if a company already has a large among of debt on the books?" He says, "I don't support Schumer and Sanders either and find that trying to regulate/legislate normal business operations have usually backfired or certainly produced unintended, unforeseen consequences. Thank you and keep up the good work. Regards, Russ S."

Thank you, Russ. I totally agree with your implication here. Levering up the balance sheet and borrowing a bunch of money to buy back stock just strikes me as fundamentally wrong, even if the company is gushing cash flow and can afford the debt. It just strikes me as a very odd practice. Now, I can understand using the cash flow to buy back shares. And I even understand the basic – sometimes there's an arbitrage here. Let's say you pay a 3% dividend yield on your shares and you can borrow for 2%. Well, there's a 1% arbitrage there, right? So I get that. "But how far do you take it?" would be the good question. And I think there's no general answer here. You have to evaluate each individual company on this. But I agree with you: you should evaluate each individual company. How much money are they borrowing? Why are they buying back stock? It's a great question, Russ. Thank you very much.

Mailbag number two says: "Dan, you imply that charting is a waste of time? Disagree. My question: does Doc's investing options a waste of time?" I don't completely understand that question. He's talking about Doc Eifrig. I'm sorry. I can't answer that question because I don't understand it. "I will chart everything of Doc's picks looking to capture a little of the up or down trend of his pick. I am only looking to trade short-term only. Don't care if the market going up or down. I do enjoy listening to your thoughts on different companies. Glad to see you relaxing with your new gig. Have more fun please, Jeff R."

Jeff, I'm trying to have as much fun as possible here, and I thank you for your compliment. Actually I think I understand the question. You're asking me if Doc Eifrig's latest investing options strategy maybe or one of his options investing strategies is a waste of time? I don't think anything Doc Eifrig does for his readers is a waste of time. Because he's got a fantastic track record and he's a great guy and he's got experience for days; I mean, for decades, really. And he knows what he's doing. But you said I implied that charting was a waste of time.

And, yes, in a previous episode, I did say what most people do – that's my point. My point is not that looking at price charts is a waste of time. I think that what most people do when they look at price charts is a waste of time. Because I think it's very simplistic and very first-level. It's not second-level thinking. It's not analytical. It's just first-level gut reaction, what I would call naïve technical analysis. And I learned the term "naïve technical analysis" from a trader named Michael Harris who you can find on Twitter. And I just think that most people kind of are fooling themselves. They're fooled by randomness in detecting these chart patterns and trading on them. And I think it's a random strategy and they don't recognize the randomness.

But there are people who do sophisticated technical analysis and make money and I – there's more than one way to skin a cat. I'm not denying that. But I think most people, most individual investors are kind of foolish with their charting. That's my point. And of course I need to leave it to individuals to decide if they're fooling themselves or not.

Mailbag number three says, "Dan, I absolutely love the podcast. Thank you for doing such a great job of telling us what we need to hear. I need your wisdom and experience here to set me straight. It seems to me like there is a huge hole in this whole bull/bear discussion. There are so many secondary factors to consider that it is pretty easy to make a case for either side. The bottom line is: because they are all secondary factors, the whole discussion is based on logical guesswork. For purposes of making money, why can't we just forget about the market as a whole? Wouldn't it just make sense to buy the stocks the institutions are buying and sell the stocks they are selling? If they are not buying, go to cash.

"This gets out of the philosophy business and cuts to the chase. It would seem to me that the best economic indicator of all would be institutional sentiment. The other discussions are fascinating but they all involve influences that may or may not apply. Let the institutions fight it out and who cares if they are wrong? They make the prices go up or down so follow them, not the machinations of people discussing disparate factors. If this makes any sense, how do we track and use this data? Much thanks, Don B."

Thank you, Don B. for your complimentary words at the beginning of your question. I question this whole idea because I don't know – I mean, I think there are people who do this. There are people who watch money flows and purportedly make money buying stocks that other people are shoving money into. But if you're asking me, "How do we track and use this data?" it sounds to me like maybe you haven't thought this through [laughs] and don't know enough about it. And I sure don't because I would never do it. I would never base anything I'm doing on what some other investor is doing, which is what you're telling me you wanna do here.

And I don't think – well, let me put it this way: it's possible that you could have a trading strategy here but really all you have is the faintest glimmer of the beginning of one and you have a lot of work to do. And how do we track and use this data? Beats the heck out of me. Good luck, Don. If you figure it out, write back in.

Mailbag number four: "I loved loved loved your first weekly rant, Dan. This information you shared about Facebook was both enlightening and frightening. Also, you're my favorite Investor Hour host. I have learned much in the several months during which I've listened to the podcast, before and since you've been hosting. I realize that politics certainly affect the stock market. However, I thoroughly appreciate that you are neither political nor vulgar. Very professional. Dwight D."

Thank you, Dwight. I included this obviously because it kinda speaks to my little second rant about being civil. And, yeah, I'm going to try really hard never to be vulgar. And I'm gonna be very civil and never throw insults out unless – in the past I have insulted some people when they've called me a fraud or something like that only. But in the future I'm just going to ignore that whole thing and we're going to have a very civil discussion in the mailbag every week.

Last one, mailbag number five. TJ says, "I've gone in circles looking for transcripts to these episodes. Where the hell are the links to them? TJ." TJ, calm down, dude. They're there. I promise. What happens I think sometimes is that we don't get the latest transcript up as fast as we put up the episode. It just takes a little bit of time. But if you go back to previous episodes – just go to, scroll down to whatever episode you want, click on it, and when you get to that page, then scroll all the way down and the transcript will be down at the bottom of the page. Okay? So if you're looking for the transcripts, that's where they are. And if you're wondering why you can't find the transcript for the latest episode, it just takes a little time. And that's the answer. Okay?

All right, folks. That is it. That is another episode of the Stansberry Investor Hour podcast. I am Dan Ferris, your host. I can't wait to talk to you again next week. Be sure to check out the recently revamped website where you can listen to all the episodes we've ever done and see show transcripts, and where you can enter your e-mail to make sure you get all the latest updates. Just go to that same address, That's it for this week. Talk to you next week, folks. Thanks for listening.

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