How “Sophisticated” Investors Get Duped

Paul Winkler: And welcome to “The Investor Coaching Show.” I’m Paul Winkler talking about money, investing, retirement planning, educating, bringing you through the news of the day, because sometimes the news is a great educator.

If you can learn from other people’s mistakes, as I’m going to talk about in a second, that’s a much better way than learning from your own mistakes. And that actually brings me to something that I was reading in the New York Times.

The Fall of OZY Media

Okay, so there was an article in the New York Times that I saw. “What They Saw in OZY” was the title of the article. I thought this was really interesting stuff. Reading about this guy that was at the forefront of this company, and I’ll just go from the article. It says:

There’s an irresistible temptation in this age of scams and hype to obsess about the man or woman at the center of a company’s implosion. Theranos’s Elizabeth Holmes was the subject of an HBO documentary and is now the center of a high-profile trial. And when OZY Media collapsed on Friday, less than a week after the New York Times reported on a series of misleading statements and actions, all eyes turned to the man at the center of the company, which is Carlos Watson: an ambitious dreamer who seemed to believe what he was selling. When he spoke with me over Zoom from a California backyard on Sunday, he conceded nothing. “I put everything into this company,” he said. “We tried to do what we could to hopefully live out a set of values about inclusivity and growth and innovation and change and possibility. Those were real things.”

So all lofty goals, right?

So I had to look up who this company was because I didn’t know a whole lot about them. I went on Wikipedia. It said that they’re an American media and entertainment company—not an area that I track a lot—that was launched in September 2013 by Carlos Watson and Samir Rao.

It is headquartered in Mountain View, Calif., with an additional office in New York City. OZY produces podcasts, television series, and events, and they received an Emmy for a 2019 television show that aired on the Oprah Winfrey Network.

So they went on in the article, and they said part of the genius of Mr. Watson is, and his whole thing is what they reflect back to the people who put up the money. The most interesting part of their stories always is the mirror that they hold up to the ones who believed.

And it is interesting. You tell somebody, “Hey, you want to learn something about somebody? Look at their checkbook.”

Well, that used to be what they’d say when people had checkbooks. “Look at their checkbook. Look at their credit card statement. You can see what somebody believes and what they believe in.”

Want to know how a bunch of seemingly sophisticated people fell for a company that every social media intern in America had questions about?

“So who was investing in this?” is what they’re saying here. “Who was actually investing in this thing? Who was backing this project?”

Well, a billionaire philanthropist was one. A hedge fund manager was another. Chief executive of a German publishing giant. A bunch of really sophisticated people, right?

And they said, “Who wouldn’t want to join that club? Who wouldn’t want to be rubbing shoulders with these kind of people and investing the same things that they are, thinking, ‘Wow, these people are really sophisticated and as long as I follow what they’re doing, I ought to be in good shape, right?’”

Now, since the whole OZY episode seemed to confirm a widely held suspicion that venture capital and advertising may be the world’s least rigorous industries. And that is something I have said many, many times. I

It’s a shame that people, as I started with, have to learn from their own experience. But I’ve commented many times on this. On venture capital and private equity and how wealthy people invest, and they’re not great role models.

A Lot of People Want to Feel Important

When we talk about investing, what is it we’re talking about here? We’re talking about people wanting to support something that they believe in.

And what is the biggest thing that people are all excited about right now? As I’ve talked about many times on this show? ESG investing. Environmental Social Governance.

“I want to invest in companies that are—if somebody really believes strongly in any of these things—I want to invest only in companies that do what I believe in.” Which if you think about it, that sounds great.

But when you’re investing in stock markets, remember when you’re investing in public markets, you’re not putting your money directly in that company. That company’s not getting your money unless it’s an IPO, which they don’t happen that often, but initial public offering.

This is where companies go in and say, “We need to raise money because we’re going to do some great things in the future.” And they’re going to put out all this stuff about how they’re going to use your money to try to get you to pay the highest price you can for it.

As a matter of fact, according to studies I saw last night on IPOs, they tend to lose money in the first nine months because people overpay for them.

They buy into the hype, they get excited, and they buy the stock. And then all of a sudden it comes down to earth again when things don’t necessarily pan out the way the company said that they would.

But that’s where you’re giving the money directly to the company. Now, any other time, what happens? You have an IPO, and then it becomes a public company, gets into your mutual fund at work or wherever.

And what you’re doing is you’re buying that stock from somebody else that owned it before you. It’s going to them. It’s not going to the company directly.

That’s the one issue that I have with a lot of this type of investing. You’re not really helping out the company. It’s not really doing anything for them.

But a lot of people do invest in these types of things. And venture capital is one where you can go straight into the company and private equity. That’s another way that people are doing exactly what I’m talking about right here.

But here’s the problem. As they said, they can be the least rigorous things out there. Why? Because they’re not regulated very well.

And you go to the Securities Exchange Commission, you look at the investment industry, FINRA and the regulators. You have companies being watched over like hawks when they have public stock. They have to actually publish all their information, their balance sheets, and all their financial information.

And you may say, well the government’s not great at regulating blah, blah, blah, blah.

Well, in reality, it’s not just them. It’s other people watching what’s going on as well.

You have analysts, the investment industry, they don’t want to look like fools. They don’t want to back something that implodes.

Every once in a while, you’re going to get something that slips through like a global crossing or something like that. But in essence, there is a pretty good regulatory watch over the industry with public markets, but there’s not.

And that’s why people do private equity. That’s why they do venture capital. The reason is because they don’t have to publish their information. And since they don’t have to publish their information, you may not know what on earth’s going on in a company.

That’s just the reality of things. Now what a lot of people do, wealthy people might do, is they might get into these types of things because they can actually do that.

They might be what’s called an accredited investor and be able to bypass the channels and invest in some of these things. And that’s what we see here: wealthy people falling for this, quote-unquote.

Now, what does it say about them? I remember when the whole Bernie Madoff thing came about. That whole thing with who got taken in by that? It was wealthy investors.

And I remember doing a video about this, and I said, “Hey, what’s going on here?”

And I think really what’s going on is that so often wealthy people think they deserve better returns than other mere mortals.

Some wealthy people think, “Hey, I’m special. I’m wealthy. I got money. I got a better car than you. I got a better house than you. I got better everything than you. I ought to get better returns than you as well.”

So what happens? They invest in these types of private ventures thinking, “Hey, I’m really sophisticated.” And it’s an ego thing.

And what ends up happening is they end up getting burnt, right? Because of all the reasons that I just talked about.

So what does it say about the people who do invest? Possibly that they want to be somebody. They want to appear to be somebody.

It’s a longing for importance that people just have in significance: “I want to be somebody. I want to be important. And how I invest may be a part of how I gain that importance. I want to be good.” Maybe it’s that. “I just want to look good. And that’s why I invest in things that I do so that you’ll think well of me.”

That’s a really strong desire for people to think well of you.

And I just think maybe a healthier way of looking at it … it just hit me.

Remember Groucho Marx? He had this letter of resignation. It’s a famous one of the Friars Club, and it’s a line that people still talk about to this day.

He says, “I don’t want to belong to any club that would accept me as one of its members.”

I always thought that was one of the funniest lines out there, and think about it. That’s a healthy self-assessment and not putting yourself on a pedestal. “Hey, look, if you want me in your club, and I’m kind of a lowly person, there’s not anything that special about me. What does that say about your club?”

Now I think that a lot of times people, even wealthy people, they’re too dependent on blind trust. Just blindly trusting if somebody else has done this: “I figure that they must have done the due diligence. They must have researched this.”

I like what Reagan said, “Trust, but verify.”

But there’s no verification in these types of things. And what happened is people got yanked in, they got pulled in, and it didn’t turn out so well because there was no real verification because that’s exactly what these companies were.

They were companies that were trying to skirt being watched over too closely. So their information wasn’t public.

Ideals for a False Utopia

So what happened is that OZY debuted in 2013. It offered a brand of sincere coverage, meant to appeal to a bipartisan audience.

“Therein,” says the Times, “lay its genius. This hopeful futurism. Diversity, without the conflict, strongly appealed to the elites who poured in the cash.”

And again, it’s that desire for something, that I really want this ideal.

And it’s interesting that younger people especially … this is what we often find. And what they said here is that the OZY website was heavy in earnest stories about young people who wanted to change the world and celebrities being their best selves.

And I remember seeing something about their depression and anxiety and that younger people, when they reached their late twenties, it was something that when they reached their late twenties, what they found was that they couldn’t change the world. That all the ideals that they wanted to support … that the world was flawed, and it wasn’t going to change.

And often they actually become depressed and despondent and just, “Oh man, you mean I can’t do all of those things? Those ideals that I had in my mind aren’t something that I can accomplish? The world’s not going to change?”

It’s kind of sad when you think about it, but a lot of people go through exactly that at that age. And it’s just a healthy dose of realism that has hit them—is really what it gets down to.

And that’s exactly what’s going on here. These people wanted to support something that was bigger than them, which again, it’s laudable.

But I look at it and go, “Invest wisely. Make sure that you’re doing the right thing. Be prudent with your investing. Don’t mess up. And then what you can do with your money that you make doing that investing properly, then go and do the laudable things. Don’t invest in other people doing laudable things. You go do laudable things.” It’s kind of the way I look at it.

And I love this line right here. And I had to read it a couple times. So I’m going to read this and I’m going to walk through what I got out of this one line, because I thought it was brilliant. It said:

“My perception is that some advertisers and venture capitalists are much more comfortable attaching themselves to media with lower stakes that is attached to lofty ideas, but not news that is going to move the needle or challenge the status quo,” said Lauren Williams, former editor-in-chief of VOX, who left the site to start a news site focused on black audiences.

I think that’s what they saw in OZY. And I had to read that. And I had to look at that a couple times because I thought, “Whoa, wait a minute. There’s something profound here.”

And it’s brilliant. People don’t really want to take a stand. This is what I read in this. It’s too risky. If you’re wrong, you’re going to look like an idiot. You could look really, really bad and people want to basically look good.

And the problem is that utopia doesn’t exist in the world.

And you’re stepping out there and doing this type of thing. And if you’re on the wrong side of an idea and it shows up, what happens to you, if you’ve taken too big of a stand.

Remember, I did this thing a couple weeks ago when I was talking about zebras. What is their camouflage? The black and white. Why?

Because they all look so alike that a lion can’t pick out any single one zebra because it’s just a mishmash of black and white stripes. And that’s the brilliance of their camouflage: they look like everybody, and that’s what people want to do. They just want to look alike so often. And it’s a lot safer that way.

So I look at this and go, “We can’t make this utopia. But the closest thing, and I’ve talked about this before as well, is capitalism.”

And so many people are demonizing capitalism now. “Oh, it’s bad. It’s terrible. There are bad people in it.”

And yeah, there definitely are. I mean, this is an example of something that went really, really wrong. But why was it wrong? It was because of the type of company.

Remember, this is not the type of stuff we want to invest in. It’s one of the hottest things out there and people, investment brokers, and you’re seeing these companies, big investment firms are jumping on this private equity type of thing.

And I just shake my head and go, “Ah, you’re playing with fire. You are playing with fire.”

But the beauty of the public stock market is you’re investing in capitalism and the beauty about capitalism is: if I want to get what I want, I have to give you what you want. I’m forced literally into doing what’s right, focusing on your needs and focusing on your desires to get what I want.

Now, it would be great to think that everybody’s good and that everybody can be trusted, but it’s just not realistic.

And that is why this show exists. That’s why the podcast exists to help educate you so you don’t fall prey to this stuff. That is the whole idea because blind trust is way too expensive.

So in essence here, the lesson, you got a company, not publicly traded, no real disclosure, people easily fooled, actually trying to follow wealthy people and look at what they do. Typically, not the greatest strategy in the world.

Wealthy people are not great investors. We see it time and time again. We see that’s who gets taken advantage of quite often. They do brilliant things, making money, building businesses, building enterprises.

But the reality of it is when it comes down to investing what they’ve earned and preserving it, not so great. And here’s just another example of that.

Don’t look at wealthy people and look at how they invest. So many investment firms do that. They try to play to that: “To invest with our firm, you have to have $500,000. You have to have $250,000 and you have to have $1 million dollars.”

And what they’re doing is they’re trying to make you think that they are something special, that you have to be special: “You have to be big enough to invest in our firm and with us.” When the reality is, it’s just another sales gimmick, if you really get down to it.

And if you look at wealthy people, they’re not necessarily great investors. A lot of times they will fall for that stuff. “Well, they must be really good if that’s their minimum to get in. They’re only investing very, very wealthy people’s money.”

Nah, don’t fall for it.

This is Paul Winkler, “The Investor Coaching Show,” SuperTalk 99.7 WTN.

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