Elizabeth Holmes was a definite whiz kid. She dropped out of Stanford University at the age of nineteen and founded Theranos, a company that was represented to the public as a company that would revolutionize blood analysis. Holmes told the public that the portable blood analyzer she developed could use a mere drop of blood from a simple finger prick to perform multiple blood tests that ordinarily would require the extraction of multiple vials of blood using needles. From late 2013 to 2015, she was able to convince investors to pour more than 700 million dollars into her company which was recently valued at nine billion dollars. However, according to the SEC which just announced the settlement of charges against Holmes and others in the company involving what they referred to as her “massive fraud,” her revolutionary blood analyzer was a non-existent sham that did not do what she represented to the public.
Much like Bernie Madoff, who never fully explained to his investors what his investment system was that was so successful that it managed to never have a losing year, Holmes never explained the technology that she claimed was behind her marvelous invention and that is the problem. You should never invest in anything that you do not fully understand. Anyone doing their homework would have found that Holmes’ representations were lies.
While in prison, Bernie Madoff gave an interview in which he said that his victims were responsible for their losses.   He said that his investors were “sophisticated people” who should have known better.  “People asked me all the time, how did I do it.  And I refused to tell them, and they still invested.  Things have to make sense to you.  You should ask good questions.”  While it is outrageous that those comments came from a man who scammed people our of their life savings, he is actually correct. No one should ever invest in anything that they do not totally understand.  In Madoff’s situation, with 20/20 hindsight we can see that his investment strategy was impossible to conduct.  It is easy to say now, but investors should not have relied on his representations.  They should have tried to understand the strategy and if they could not understand it, which no one would have been able to do, they should not have invested.  The same lesson applies to Elizabeth Holmes and the investors in Theranos. No one should have invested in her company unless they understood the product she said she had developed. Regardless of how honest the person requesting your investment appears, you should never invest in anything unless you fully understand what you are investing in.
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