If You’re Going to Invest in Ponzi Schemes, Diversify
We had a joke at my old office that Ponzi Schemes would be a great asset class if only someone could appropriately manage the duration risk. In other words, the optimal Ponzi Scheme would be a Ponzi Scheme of Ponzi Schemes. Because while every individual Ponzi Scheme is eventually going to be found out, if one could theoretically ladder them together, there’s very little chance that they would all be found out at once, which would smooth the return stream for a very long period of time. Theoretically.
But before the SEC comes knocking, know that I am not doing this. Moreover, know that I am not suggesting FTX or any of the other speculative recent blow-ups were or were not Ponzi Schemes. (History will be the judge.) Rather, what I’m suggesting is that you can (again, theoretically) take unimaginably stupid risks (like investing in nothing but a portfolio of Ponzi Schemes) as long as you are properly allocated.
Look, everyone is going to get duped. I’ve invested in companies that I now know were probably fraudulent. I’ve been stolen from. I’ve trusted people I shouldn’t have. I’m still here. The reason is I never put everything on the line.
The heartbreaking thing about FTX and others such as Enron was that many innocent people did. The Wall Street Journal reported that “Some employees kept their life savings on FTX” because they “trusted that everything was fine.” This is a problem. You don’t invest in your employer let alone custody your assets with it because if something happens everything is gone.
I get made fun of around the office because I like to find “idiosyncratic assets” and “uncorrelated return streams”. In fact, I’m not allowed to use those words around real people lest I get punched in the face. But there’s method to the madness.
I truly believe that volatility is your friend. It’s only dangerous if you can’t survive it. It’s only when the game doesn’t end on your terms that you lose.
The corollary to this is that correlation is the most dangerous force in the universe. But note that correlation is not concentration. I bet (theoretically) that you could even be concentrated in Ponzi Schemes as long as they wouldn’t all collapse at the same time.
— By Tim Hanson
