Lessons learned from the Madoff scandal
What can we learn from that Bernie Madoff character? He’s the guy who pulled off a $50 billion Ponzi scheme by ripping people off for decades, claiming to be investing their fortunes, paying them inexplicable returns on their money and all the while stealing from them blind. There are several important lessons we all need to learn from this bit of history.
Number 1: Know what you own. No matter what type of assets or investments you have, make it your business to know exactly where your money is. If your fund manager or broker cannot give you an explanation you can understand, that is not necessarily a reflection on you; it could be that person is more unsure than you are. Keep asking questions, keep researching and keep digging, and don’t stop until you are able to describe each of your assets and investments in 25 words or less.
Number 2: Know who’s managing the store. Madoff’s clients were too trusting when they handed their money over to this mysterious stranger. I can imagine that the mystery surrounding the old gent gave some of them some kind of weird confidence. That was dumb.
Number 3: Don’t fall for unbelievable deals. Remember the old adage: If it’s too good to be true, you can bet that it is. Get rid of your lottery mentality. There are no get-rich-quick deals out there. If you think you see one, figure out what it really is; then run.
Number 4: Trust, but verify. I don’t know what kind of annual accounting documents and records Madoff’s clients received, but now we know that whatever they may have received was all fake. A moderate effort on his clients’ behalf to verify their tax returns would have probably shown the truth.
Number 5: Don’t assume someone else will protect you. There’s no doubt the Madoff crowd assumed they had some kind of protection against being stung by a scoundrel. After all, most securities professionals and others carry insurance to cover clients in the event of an embezzlement scandal.