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'There are idiots. Look around.'

John Meriwether's first hedge fund, Long-Term Capital Management, failed in 1998, and almost brought Wall Street down with it. His second hedge fund, JWM Partners, closed this summer. Now he's setting up a third hedge fund, based largely on the same strategy that underpinned the first two. And it appears that people mean to invest in it.

Meriwether, in other words, is proof that markets are not efficient, and investors are frequently stupid, and frequently dazzled by slick sales pitches. Indeed, the best analysis of this tendency came from an unpublished paper by Larry Summers attacking the very concept of all-knowing, all-seeing markets. "THERE ARE IDIOTS," his paper began. "Look around." Meriwether's comparative advantage, it seems, is in knowing exactly where to look.

By Ezra Klein  |  October 23, 2009; 10:46 AM ET
 
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Comments

Why only individual investors? Even governments and municipalities can be badly wrong too. Here is the news on Bloomberg how state of New Jersey is doing stupid things:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aL8bFa17XvlM

Next, if you really want to cry how States further bankrupt their own tax payers, look at this audit report in California where how $1.3 Billions were paid in over time:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/10/21/BAP11A8NRF.DTL

So we Californians and New Jersey tax payers are equivalent of those fools which you pointed in your article; like those who are still interested in investing Meriwether's third fund. Possibly Calpers and other State Pension fund money as well might be clamoring for that coveted early bird status in this third fund of Meriwether, who knows....

Posted by: umesh409 | October 23, 2009 11:41 AM | Report abuse

I don't understand Larry Summers. How does he write a paper that points out the important fact that there are idiots and at the same time hinder people like Brooksley Born?

Posted by: bcbulger | October 23, 2009 12:32 PM | Report abuse

Being stupid is one thing, Klein. Being stupid and working to enshrine that stupidity with the force of law is something else altogether.

Posted by: msoja | October 23, 2009 12:47 PM | Report abuse

No. These funds are *very* profitable -- in the short term. In today's business world, it's all about the quarterlies.

The "idiots" are the ones left standing when the music stops.

Posted by: sgsguru | October 23, 2009 2:59 PM | Report abuse

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