The Madoff’s scam happened in 2009..when I wrote a piece for Reuters.in. This article is based on that piece. Madoff scam was really big and took the 2009 Christmas look terrible…the lessons are important..and VALID even in 2016.

Once in a while a man comes along and takes people for a ride. What is amazing about Madoff’s scheme (how funny that he should call it a Ponzi scheme!) Ponzi scheme was actually much smaller. I think it should now be called Madoff scheme. It is time Mr. Ponzi was allowed to retire.

Losing money in a scam like this is bad. Let us not lose the learning. Here is my summary of the learnings:

1.    Just because some celebrities – Arnon Milchan, Zsa Zsa Gabor, Ira Lee Sorkin (Madoff’s lawyer), a senator, Larry King, etc. have invested it does not make any investment a ‘safe’ or ‘sensible’ investment. Very clearly ‘smart investor’ looks like an oxymoron! Remember Michael Fereira selling something? Or some stupid Indian celebrity selling a financial product without understanding what it means?
2.    He was just like one of us! Such a commonly heard dialogue – and looks so foolish in retrospect. Stay away if you do not understand what it can do for you. Remember he cheated the Church group to which he belonged!!
3.    Awards are available –and it looks like it can be bought! Almost all colleges claim to be in the ‘top 5’ or ‘top 35’ or some such ‘top list’. Top list is more a media creation – and not a meaningful way to judge a fund manager. I remember one insurance company which is a joke winning a technology award.
4.    Normally a financial planner will tell you that ‘if a plan is too good to be true, it is not’. Madoff sensibly did not over promise returns. He also under performed when the tech bubble was being built. So a old warning bell was never touched by Madoff. Remember what he gave was dangerously STEADY. Nobody can give you equity returns of 1% p.m. JUST NOBODY.
5.    Regulators – sleeping with the enemy is not too good a habit. Regulators have failed just too many times when the bubble was being built. So depending on the regulator to look after your personal investments is over ambitious – and almost foolish. Staying too close to the persons whom they regulate is not a great idea.
6.    A million times I have said this in the past – please open your demat account with a bank. Preferably with a bank which does not have any broking ambition. Keeping your portfolio with your fund manager – and he having full control on that is not a smart thing to do.
7.    Investing in schemes like Madoff is just a ‘short-cut’ method to chase alpha. If you index your investments with a good (read inexpensive on asset management costs and low tracking error) the chances are you will not too much money vis-à-vis the market.
8.    Have a demonic control on costs. Do not trust a manager who says he makes money by the trades he does. This is like going to a doctor who says he makes enough money by selling medicines to you!

9. KEEP your investments simple, and understand why it makes money. If this is too much for you keep all your equity money in a couple of index funds.

So if you are willing to learn some of the basics of investing (asset allocation, power of compounding, etc.), say NO to products you do not understand, index your investments, you may not be the richest man on earth, but you will not lose money! You can look at Mr. Warren Buffet in his eye and say “Sir, I remember your first rule of wealth creation” – I have not lost money, and therefore benefited by the power of compounding!

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

  1. The irony of modern life, including finance, is that due to the high chaos factor, there is very unlikely to be a repeat event of the same thing. Hence, the learning factor from any event, however major, is very low.

    Sir, when past performance of a fund is not applicable to future performance of same fund itself, how can you claim to say that the past performance of one fund (Madoff’s) has any relationship with a totally different fund, and that too in future!?!?!?

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>