Ten thousand Russians mobbed the streets in front of s offices and the colonnaded headquarters of Moscows Conunodity Exchange, smashing windows, pushing, shoving, sleeping in the streets and on sidewalks, and offering bribes of thousands of dollars to cut to the head of the line, as they desperately tried to redeem their shares. Some stared blankly into space wondering what had become of their savings, others called for hunger strikes, and several threatened to immolate themselves. The firm then announced it was nearly bankrupt and shares would be redeemed at Moo of their previous value.

Ex-comrade Mavrodi did not lose his cool. He blamed the entire crash on government meddling, stating none of this would have happened had they let "free ente rise take its course." He promised that "in two or three mondis the price will retum to its previous level of ten thousand mbles." As an added kicker, he offered to immediately redeem the shares of the most needy at $50. "We, unlike the state, have never deceived you, and never will," he announced. He also stated that the fund was on the verge of a super breakthrough in which the shares would be sold in the U.S., Germany, and other countries. A large number of shareholders believed him in spite of their enormous losses. Queues formed to buy shares in August-mere weeks after the crash-even after the govemment had exposed as a gigantic pyramid scheme.

A good promoter has nine lives. After being carted off to jail for tax evasion shortly after the collapse, Mavrodi came up with another audacious scheme. Russian law gives a member of parliament immunity from prosecution for all but the most serious crimes. Mavrodi ran for parliament in a district with large numbers of owners. He never set foot in the distiict, relying instead on the same media blitz that drew millions of Russians to . He urged people to vote for him so he could save the firm, portraying himself as the litde man pitted against the bureaucratic state. For those who didnt have the misfortune of owning shares, he guaranteed to make the distiict a "httie Switzerland," promising $10 million of his own money for the project. Not su ris-ingly, he won.

At his victory party, safe from prosecution, he could fess up. He told 3,000 supporters at the celebration that the resurrection of would be put off indefinitely, and walked out, naturally with his large fortune intact. People exploded in anger, ripping up worthless shares as they finally realized there was no hope.

The scam shows how easy it is for people to fling their life savings on a wild-eyed scheme they know nothing about. Sure, we might think, there are a few madmen out there who will bet their fortunes on a throw of the dice. But, which of us wont say, / know better than that.

You Can Never Go Wrong in Real Estate

The rational man, like the Loch Ness monster, is sighted often but photographed rarely. Everybody claims to invest rationally, but point a camera at them when speculative opportunities arise, and something fogs the film. The developed photo fails to show any sign of that rational being beloved by economic theorists. What usually can be made out instead is a blurred image of a frenzied crowd.

In the 1980s, the behavior of well-trained professionals in American, Westem European, and Japanese real estate, considered to be among the worlds most sophisticated markets, underscores this point.

In The Graduate, a guest at Dustin Hoffmans graduation party takes him aside and whispers one word to him-plastics. Thats where fortunes would be made in the 1960s. In the 1980s it was to be commercial real estate. The beginnings, as they often are, were sound enough. The remarkable boom in real estate was triggered by its impeccable performance in the past. Real estate had a solid record of appreciation since the war, and, like stocks, was an excellent shield against inflation. Because it had only gone higher in the past 40 years, it was inevitable, the smart money believed (and all money thinks it is smart), that it would continue to soar.

Big bucks flowed into commercial real estate. Banks, after losing heavily on third world loans, eagerly poured money into real estate. With prices ratcheting up, savings and loans, insurance companies, and other financial institutions increased their commitments, while the nations gargantuan pension funds entered this market, many for the first time.

Real estate syndicators could sell their merchandise at 110% of its assessed value, which was stretched liberally. This meant the developer was given all the costs of land and constmction, plus his overhead and profit-often before a cubic yard of earth was moved. In the past, conservative institutions (usually banks) would only offer developers interim financing, well secured by other collateral, and for a fraction of the

Im no fool, Im no compulsive gambler. Still, millions bought these odds with , all doing the same remarkably foolish thing.

What makes vast numbers squander their savings on such a harebrained promotion? Strange as it appears, can we dismiss these poor folks thronging the streets, desperately buying and selling worthless paper, as simply naive investors in a totally undeveloped market?

Lets look at this question next.

overall development cost. The rules had most definitely changed. Buyers were so excited by real estate (usually the loans were accompanied by equity participations) that they often forgot even the most rudimentary valuation standards.

The equity investor found a multitude of other advantages, including tax write-offs and leverage. Say, for example, that I bought a property with an 80% mortgage. Suppose further that the property doubled after five years--conservative in the eighties. I would have sixfolded, not doubled my money, since I had put up only 20% of the price. Because interest, depreciation, and other expenses were tax deductible, I could write them off against other income, thus minimizing their impact. Not a bad deal.

When commercial real estate appreciated at a 15% clip through the early eighties, everyone wanted on the bandwagon. Pension consultants urged their major clients to jump in. A large number of the decisions were based on modem portfolio theory. After all, here was a place where they could make 15% or higher retums. Much more dian die stock market. Better yet, it added diversification and lowered beta, which, according to their efficient market training, made the retums greater still. Large pension funds placed major money in questionable ventures, many near the top.

Consultants often urged their clients to invest with managers who had hot hands. Here we see a bit of the bizarre. Unlike the stock market, which appraises the value of a stock on every trade, the real estate manager was allowed to appraise his own properties. He simply assigned a value to the clients property at years end. That he took 20% of the increase in appraisal price, which could mn up to 30% or 40% of the propertys value, or that scads of new money swarmed to him because of the fabulous retums-created with the stroke of a pen-didnt seem to impugn his impartiality. Not unlike declaring four aces and raking in the pot without a showdown. As a money manager, Im a htde envious. Here is a market that a deserving manager should find only in paradise.

Does this sound zany? Of course it does. Nonetheless, it was done by many of the largest 1 pension funds, on the advice of some of the most blue-chip consultants in the country. Once again, a crowd mesmerized by the image of limitless wealth threw caution to the winds and headed for the cliff.

In Japan, although property prices had increased ten times in a few years, the major banks loaned money at approximately 100% of a proposed projects value. After all, believed investors in the late 1980s, Japanese real estate, like Japanese stocks, could never go down. It was little different in the West. Commercial space for rent expanded enor-