A good friend comes to see you. He’s setting up a securities company and is looking for investors. This friend has impeccable credentials: former chair of a major stock exchange, senior and well respected member of the financial world. Simple decision? Of course. You jump at the chance to invest and you spread the word to all your friends.
As it turns out, your investment with this friend is a winner. The fund starts providing you with consistently solid returns; it’s astonishing how clever this bloke is. The fund’s reputation grows. Soon everybody who’s anybody wants in – even more so when admission to the fund is restricted by invitation only.
Things continue in this comfortable vein for some time. While the market is strong, the performance of this fund is greenbacks on the cake. Whenever the market starts to head south – and this is the best bit – the fund continues to grow at over 10%! It seems too good to be true.
And it is.
If there is one story that captures the essence of the financial market’s ‘annus horribilis’ in 2008, it must be the emerging story of Bernard Madoff’s gargantuan fraud. (If you’ve missed the story, there’s a good summary at http://is.gd/cp2a.)
The Madoff fraud – like its big brother, the Global Financial Crisis – is characterised by one persistent weakness: the failure of participants at all levels to pursue what Jim Collins calls the Brutal Facts (http://is.gd/cpmI).
The Brutal Facts, put simply, are the truth. While it might seem self-evident that we would want to know the truth in all situations, the reality is that most of us have a strong tendency to avoid the truth when it might hurt.
In finance and business this leads many to ignore the fundamentals. It happened during the internet bubble a few years ago, where businesses without any cashflow were ridiculously overvalued by investors. It has happened in the Subprime crisis, where high risk loans have been disguised behind a heavy camouflage of complex derivatives. And it has happened to Mr Madoff’s faithful investors who have learnt, to their cost, that money doesn’t grow on trees afterall.
We’re all prone to it. Whether it’s suppressing the sinking feeling that a new assistant isn’t going to be up to the task, convincing ourselves that we are indispensable, or putting off a doctor’s appointment for fear of what might be revealed.
It takes a clear head – as well as a fair degree of honesty and courage – to confront the Brutal Facts. This makes it easy to shrug them off when we’re busy, and underlines the reason why we need to give them space during our down time.
Over this New Year period, be wary of friends bearing unbelievable investment opportunities. But don’t miss the chance to think about what Brutal Facts you might be overlooking or ignoring.
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I've been work- ing in business, one way or another, for the last 20 years, and writing for the last ten. My main interest now is to get messages across - yours and mine - in a readable and approachable fashion. 
