The Deadliest Sin

In the sixth century A.D., Pope Gregory the Great
categorized humanity’s most critical foibles as the "Seven
Deadly Sins." In the twenty-first century A.D., a New York
editor of no particular repute encourages investors to
avoid at least one of these deadly sins: Pride.

Indeed, he would also encourage everybody everywhere to
refrain from envy, anger, sloth, avarice, gluttony and
lust. But pride seems to be the deadliest of INVESTMENT
sins.

To illustrate today’s morality tale, we present Alberto
Vilar, an individual whose self-evident arrogance led
directly to his downfall. Vilar, the man behind the
triumphs and tribulations of the Amerindo Technology fund,
is currently warming a cot in Manhattan’s Metropolitan
Correction Center, while trying to make bale. The fact that
Vilar, a purported billionaire, can’t scrounge up $4
million for his bail, suggests that he might also be guilty
of a lesser sin: deceit. Indeed, he finds himself in a jail
cell precisely because he has been lying to the world about
his "investment" activities.

Vilar and his partner, Gary Tanaka, were each charged on
three counts of scheming to defraud, obtain money by false
pretense and wire investor funds across state lines with
the intent of converting the money to personal use.

Allegedly, Vilar induced a longtime client to invest $5
million with Amerindo, transferred the money to personal
accounts and then made misrepresentations about the status
of the investment. "Vilar allegedly used the stolen dough,"
Reuters reports, "to make a $540,000 contribution to his
alma mater, Washington & Jefferson College in Pennsylvania;
make a $177,000 donation to the American Academy in Berlin;
cover the $14,640 cost of a party he threw, and pay for the
repair of a dishwasher in his $12 million, 30-room co-op in
the shadow of the U.N."

Vilar, who made a fortune investing in Internet stocks and
gave millions in philanthropic donations, may have been a
kind of Robin-Hood-to-the-arts. But he did not neglect to
throw a few ill-gotten millions into his own banks
accounts.

Prosecutors said the $5 million theft may be just the "tip
of the iceberg."

"We have a concern with the scope of the fraud involving
Vilar and his partner Tanaka," says Assistant U.S. Attorney
David Esseks. Tanaka also was arrested and charged with
stealing money from Amerindo investors to buy expensive
Thoroughbred horses.

Vilar rose to celebrity and riches on the waxwings of the
late-1990s technology stock bubble. As the manager of the
Amerindo Technology fund, he placed very concentrated bets
on some of the era’s highest-flying tech stocks. The fund
performed brilliantly, for as long as tech stocks continued
to fly high…then performed miserably when the tech bubble
burst. But Vilar’s ego never seemed to admit the
possibility that Lady Luck, more than investment skill,
underwrote his fund’s dazzling results.

When we first encountered the hero of our tale in 2000, he
was scowling from the cover of Barron’s. In 1999, his
Amerindo technology fund had produced an astounding one-
year return of 249%, and Vilar was justifiably – and unjust
ably – proud of his achievement.

In the Barron’s story, Vilar scorned the notion that his
dazzling investment results might have been the fruit of
recklessness, rather than genius. Indeed, he scorned
everyone who dared to criticize his risky investment
strategy. "These people don’t know my record," he scoffed.

Unfortunately, Vilar’s excessive pride blinded him to the
possibility that he might have been lucky, rather than
good. His deadly sin prevented him from imagining that the
once-in-a-lifetime tech stock bubble might not endure for
his entire lifetime, or even for one more year. The
Amerindo Technology Fund tumbled 84% during 2000 and 2001.

"He’s a miserable human being and a basic scumbag," says
Donald Trump. "He spent $2 million trying to fight me when
I wanted to build the Trump World Towers…He was
intractable and foolish and he ended up getting his [butt]
kicked by me." Trump means that the towers were built.

We couldn’t say for sure that Vilar is a scumbag, but we
wouldn’t rule out the possibility. What we could say for
sure is that investors with egos the size of Vilar’s, do
not deserve to succeed. The investment world doesn’t
usually work that way. But please don’t think we are
kicking a man when he’s down; your New York editor also
kicked Vilar when he was up. Even while Vilar was standing
as tall as the Colossus of Rhodes, we wagged our editorial
finger at the man’s hubris, noting that pride often comes
before a fall. Thus, as Vilar’s star began to fade, we did
not refrain from highlighting his well-deserved demise.

Please permit us to reprise a few paragraphs we wrote
nearly one year ago in the Daily Reckoning:

"The bubble burst four years ago, but some investors still
struggle to understand that stocks sometimes fall…a lot.
Gone are the days when the most successful personal
financial plans relied upon pulling cash advances from Visa
cards and buying shares of the Amerindo Technology Fund.

"The once-ascendant Amerindo and its preposterously pompous
manager, Alberto Vilar, have been laid low by the financial
market fates. The Amerindo Technology Fund has cascaded
more than 80% from its bubble market peak in early 2000. At
the zenith of the bubble, Mr. Vilar confused his supreme
good fortune for supreme genius. However, in this, the
post-good-luck era, the ‘genius’ hypothesis may require a
brief re-examination.

"Here at The Daily Reckoning, we never fall victim to the
sin of hubris, mostly because we have never performed a
deed worthy of hubris. Neither do we confuse good luck with
genius; that’s because we have been immensely lucky to have
avoided any form of good luck that could be confused with
genius.

"We feel very lucky that we may arise every morning and
draw a deep breath; we also feel very lucky that a
Starbucks coffee shop is almost always within walking
distance; and we feel luckiest of all that we are not
geniuses. The burden of genius is simply too great to bear.
Perhaps genius is a suitable trait for the likes of Albert
Einstein and Alberto Vilar, but not for us.

"Now that share prices have been falling – more or less –
for the last four years, investment geniuses have become
quite scarce. Today, mutual fund managers are merely well
paid mortals, not the demigods that the lumps once imagined
them to be. And these mortals, as a group, have been
amassing a lengthy record of earthbound performance."

As it turns out, dear investor, Albert Einstein bore the
burden of genius far more capably than did Alberto Vilar.
Even after the tech-stock "marvel’s" track record became
merely mediocre, he refused to be humbled. He continued to
bet on many of the stock market’s riskiest stocks, while
simultaneously condemning those who questioned his
investment acumen. And when all else failed, he (allegedly)
stole money to conduct the lifestyle that a genuinely
successful investor might enjoy.

Yes indeed, pride is a deadly sin, dear investor…
particularly on Wall Street. An investor who has never
learned to approach the discipline of investing with
humility is an investor who is certain to learn humility in
the future…Just ask Alberto.

When the tech stock bubble burst in early 2000, many of the
stock market’s riskiest stocks collapsed…but not all of
them. Surprisingly, several small-cap indices continued
climbing to new all-time highs, handily outperforming the
S&P 500.

Perhaps the trend will continue, but we suspect the time
has come to take the other side of that trade.

Furthermore, even if the economy is not slowing, small caps
are no longer cheap relative to the big guys. The small-cap
rally since 2000 has purged a great deal of value from the
small-cap universe. The S&P Smallcap 600 now sells for a PE
ratio of 21, which is nearly identical to the S&P 500’s.

The small-cap sector will continue to breed compelling
investment opportunities, of course. But in general, the
large cap sector seems like a much safer place to stash
investment capital for the moment.