Investment analysts like to retell the old saw that when you start to get investment tips from your barber, cabdriver (fill in the blank) it is time to sell. But who knew that is how high finance worked. It seems that a tip from a golf partner or an overheard conversation in the lounge of a swanky Palm Beach country club is all it took for some investors—even institutional investors—to plunk down a considerable chunk of money with Bernard Madoff.
Now the Alliance for Investor Education (AIE) puts out a news release titled: AVOIDING MADOFF-STYLE PONZI SCHEMES: 12 OF THE BEST RESOURCES FOR INVESTORS
Rarely does an e-mail come across my desk that causes me to laugh out loud but this one did. Who did they cite as their expert sources to accomplish this? Why the very folks who dropped the ball for better than a decade regarding Madoff. A “19-Member Alliance Including SEC, FINRA, SIPC, and State Securities Administrators Highlights Top Tips for Investors.”
I apologize for a possible over simplification but the first rule to avoid swindles is to DO YOUR DUE DILIGENCE. The second rule is to follow the first rule even if other really big names are in the fund or the manager is a famous exchange executive or if big name Hollywood types are invested in it or if numerous charitable non-profit organizations are invested in it or if the manager is only promising modest returns.
After all, due diligence isn’t simply an exercise to catch fraudsters, it is a necessary part of identifying sources of investment returns and is vital in piecing together a portfolio. Fund of funds — one of the hardest hit groups in the Madoff mess — are supposed to look closely at every manager they give in allocation to, to make sure they are diversified. What was Madoff’s strategy and how did it perform against his peer group? If his performance was better, that is good; if his performance was much better and non-correlated to the peer group that’s a red flag. In fact it is game over.
We have seen some unprecedented financial events over the last year and we as a nation are woefully uneducated regarding financial matters. How else can you explain our continued reliance on individuals who were wrong all along to help us out of a mess they created.
We had a meltdown involving investment banks and a former investment bank official, Treasury Secretary Hank Paulson— who assured us the worst was over — was able to convince Congress to basically give him a blank check to fix it. They were scared and agreed because they didn’t know any better. It is time we all knew more because the folks we have entrusted these things to don’t and if they are wrong most will get punished with multi-million dollar golden parachutes. If you don’t have one of those, you need to get educated.
Tags: INvestor due diligence, Madoff, Paulson
