Fraud, Lies, Social Proof, and the Will to Believe: Theranos

So what do you think? Are you enthused, impressed, and a believer?   Read

Here is an early interview of Eliz. Holmes: Could this finger prick blood test be the next “Game-Changer? Imagine if this company can change the cost and inconvenience of diagnostic care? Wow!

Why study this case of Theranos?

Whenever you study an investment, you should make notes on your thoughts at the time to go back and check your thinking and biases.  How else can you improve as an analyst?

Now, unless you have been living in a cave, you know what happened.   However, pretend that you didn’t know the outcome and you were reading the articles above for the first time and seeing the video.   What RED FLAGS jump out at you.  Or what would you need to prove in order to invest?  And if you could not find the answer easily to the main question of the investment, what else would you scrutinize carefully?    Think hard before reading on………..

Fortune Article Author Follow up with how he was misled by Theranos

Notes on Bad Blood

I highly recommend the above book as a great read.  You will also learn about investor manipulation, the will to believe and how it shuts off our critical thinking abilities, incompetent governance, employee abuse, EXTREMELY bad management, criminal actions, and a female sociopath.  I could not put the book down–read it in a day.

Next, a few years later, when Theranos, a private company with an estimated $9 billion value (!), faced a barrage of critics over the lack of transparency and no verification of the technology (“The Edison”), Cramer gives her a chance to rebut her critics.

Cramer asks Holmes about her Technology. What do you think of the answers? If you were an investor, what would be the first area to investigate?) Did Cramer ever follow-up specifically? No.

By the way, did you notice her deep (affected?) voice and her black uniform. Creepy.

As a former employee said Theranos product was like building a bus while driving down the highway with passengers.   The problem is that people could get killed.   This fraud hit home since I have amyloidosis.  Not only did she and her accomplices hurt employees, investors, and–most importantly–PATIENTS! She and her CEO deserve a minimum 25-year sentence.

Note how SOCIAL PROOF euthanized investors critical thinking.   Look  at the prestigious board: George Schultz, General , etc.   But note the lack of specific product/industry expertise to vet Holmes’ claims.    She brilliantly piggybacked on the prestige of others.   Any investor could have visited the Walgreen stores to check on the accuracy and completeness of the tests. Red flags would fly.

The employee turnover and secretiveness would have been other flags.  What relevant experience to this field did she have?  I am not knocking outsiders, but she and her CEO lacked any background in biochemistry.   That isn’t enough to suspect problems, but it would place more urgency on verifying the efficacy of the technology.

6 responses to “Fraud, Lies, Social Proof, and the Will to Believe: Theranos

  1. Whenever I do a case study on a failed business or scam, I like to ask, “What would’ve been the simplest and fastest way to call b.s.?”

    Google used the ol’ shoe-leather approach to call b.s. on Theranos:

    “We looked at [Theranos] a couple times, but there was so much hand-waving — like, Look over here!— that we couldn’t figure it out,” Maris tells Business Insider. “So, we just had someone from our life-science investment team go into Walgreens and take the test. And it wasn’t that difficult for anyone to determine that things may not be what they seem here.”

  2. Excellent point–try the product, of course. Assuming you could not do that, then you would try to find those who did try the product. Failing that then your next guide post might be the Board. Even with hindsight it is hard to see how one could have the facts to invest given the other red flags.

    The sounds to good to be true was a major warning.

    The other lessons are the secrecy, the employee turnover, and the management team.

  3. W.E. Buffett has some relevant commentary. Operating out of Omaha keeps him grounded, avoids “miasmas of stupidity” (to paraphrase Munger), and insulates him from the sort of elitist groupthink you find in SF, D.C., NYC, etc.

    “Goodman: Don’t you find Omaha a little bit off the beaten track for the investment world?

    Buffett: Well, believe it or not to, we get mail here and we get periodicals and we get all the facts needed to make decisions. And, unlike Wall Street, you’ll notice we don’t have fifty people coming up and whispering in our ear that we should be doing this or that this afternoon.

    Goodman: You appreciate the lack of stimulus here?

    Buffett: I like the lack of stimulation. We get facts, not stimulation here.

    Goodman: How can you stay away from Wall Street?

    Buffett: Well, if I were on Wall Street, I’d probably be a lot poorer. You get overstimulated on Wall Street. And you hear lots of things. And you may shorten your focus and a short focus is not conducive to long profits.”

  4. Hi,

    Could you allow for email subscription to the blog? Not able to register.

    Great content as always!

  5. John, this case study is typical in bull markets when investors who put trust in people who do not know anything about running a public company, only know how to raise money. This is the danger of the markets and investors who do not pay attention to history and do not know the value of the securities that they purchase or being purchased on their behalf. Another case study is the Pennsylvania Pension System. In an article by CS Pennsylvania, the state paid wealth managers 6.8 Billion dollars in fees alone, with no investment results. The new bill in the pension system that will go into effect in 2019 is that the employer will now be responsible for their own retire through the 401K system with their own contributions. Also, there will be a 10% reduction in the current system because the state of Pennsylvania failed in their fiduciary duty to their employees to oversee the management of their retirement plan. This problem will be worse in the future because Financial Managers who are suppose to make money for their clients, are making money off their clients in fees and are not concerned about their investment returns. Buffett says it best, “if you are in a poker game and you do not know who the patsy is, you are the pasty.” Ordinary everyday investors are being taken advantage of because of their lack of knowledge of the Financial markets and how they work.

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