How to Spot a Con Artist Before You Give Him Money to Invest

In February of 2004, I read about a twenty-eight-year-old hedge fund manager in The Wall Street Journal that was so weird I clipped it out and saved it in my journal.

The story focused on the return to high living in financial circles and used Bret Grebow, cofounder and principal of The HMC International Fund, as its prime example. Among the excesses he shared with the reporter were his purchase of a $160,000 Lamborghini (“his first ‘treat’ in months”) and the chartering of planes for $10,000 a pop to fly between Florida and New York (an air corridor not exactly underserved by commercial aviation).

But what really caused me to whip out the scissors and save Mr. Grebow’s story was his reasoning for spending $10,000 on a private jet instead of say, $300 on JetBlue: “It’s fantastic. They’ve got my favorite cereal, Cookie Crisp, waiting for me, and Jack Daniel’s on ice.”

Hmmm. If Warren Buffett, a bona fide billionaire, was compelled to christen his private jet The Indefensible when he finally bought one, it would seem that Grebow was guilty of a serious lapse in judgment — in both capital allocation and discretion (if not taste in breakfast cereal).

I remember wondering at the time how good at investing a guy like this could possibly be. Not to mention what his clients would think once they saw how he had presented himself to the world.

Almost two years later, in a Christmas present to investors, the SEC filed suit against Grebow and his partner for stealing $5.2 million of the $13 million they’d raised from 80 investors.

The HMC International Fund — whose motto was, ironically, “integrity & performance” — was promptly shut down.

From there, all the woulda-coulda-shouldas came forth in the press and blogosphere, as a cursory check of Grebow’s background on Google and other sources would have shown a, shall we say, troubled past.

More than just the numbers

In a post-Madoff world, money managers — whether egregiously spouting off to reporters or not — can count on being googled as a matter of course. It’s easy, convenient and free. But assuming no rap sheet or obvious shady dealings, what other kind of due diligence should be done by clients before hiring a manager?

It’s time to look beyond statistics and reams of data.

Not that a close examination of intra-period trades isn’t called for to make sure that the manager isn’t indulging in investment sins — from window dressing to saying one thing and doing another. Because quantification is at the heart of investing, and because it is a highly analytical profession, it is easy to overlook that which cannot be expressed numerically, such as character, temperament and motivation.

Three steps to take:

Ask personal questions. Portfolio managers are by and large a hyperanalytical and nerdy lot, so I am not suggesting that you judge them solely on their social skills. That said, I don’t know where in the rule book it’s written that you can’t ask personal questions.

Knowing a manager’s pet charities (where are all those millions in donations coming from?), board commitments (too many?), hobbies (expensive ones?), and where they spend their time says a lot about them. When I ran my own money management firm, our analysis of small-cap stocks always included a close look at the CEO and his or her team.

Your selection of a fund manager should be no different.

For example, I once met with the CEO of a company during a one-on-one breakout session at a research conference. His body language screamed, “I don’t want to be here!” and he met our desire to understand his business with the barest modicum of civility, fleeing when time was up as though we’d exposed him to the Ebola virus (remember this was pre-COVID).

This behavior continued throughout the day with all other investors, so clearly it was nothing personal. While I can understand that meeting Wall Street is any self-respecting CEO’s least favorite part of the job, shilling your company is a fact of life, and pissing off prospective investors is, at best, self-indulgent and, at worst, puts a lid on the stock. Sure enough, a few weeks later this CEO announced his retirement.

Meet them on their own turf. A nice suit, a new pair of shoes and a polished presentation can go a long way towards making a positive impression and, in the process, mask important red flags. That’s why an on-site visit should be part of your due diligence.

A consultant friend once told me that he learned the importance of qualitative due diligence after he decided to drop in on a firm that had been marketing to him assiduously. The portfolio manager refused to come out of his office to meet with him (certainly a black mark), but the pièce de résistance was the wall of beer cans in the office. This was no collection of travel souvenirs or the beginning of a recycling drive, but Budweiser cans — presumably emptied on the premises.

Push beyond first impressions. I’m convinced that some of the reluctance to look beyond the numbers and at the investment managers themselves is due to our societal deference towards the rich and/or successful. (Many money managers have become very wealthy over the decades.)

I witnessed firsthand how much of a defensive shield money, power and success can be. It was during a meeting at the office of a well-known money manager who graciously allowed me to sit in with the management of a health-care company.

The view from his aerie was priceless. The art in his office was priceless. And the deference with which he was treated by management and everyone else in the room was priceless.

I’m certain he didn’t get asked all sorts of nosy, probing questions to figure out where his head was at with respect to his business. But he should have been.

Sound investment has always been about the people behind the numbers.

And while past performance may not be a guarantee of future returns, past behavior — good or bad — usually is. So go ahead … ask your manager what they eat for breakfast.

It may be the best investment decision you make.

Illustration credit: Joseph Morewodd Staniforth, Public domain, via Wikimedia Commons