Q: How could the Bernard Madoff “Ponzi Scheme” have happened in this day and age?
A: There are some golden rules, when it comes to investing money. Here are a few that relate:
If you don’t understand it, don’t invest in it.
- Never let greed get in the way of common sense.
- Trust, but be and stay informed (verify).
- Never write your check directly to the financial advisor.
It is quite possible that many of Mr. Madoff’s clients failed themselves on all four of these protective fundamental rules, but as you can see, there is no doubt about the fourth.
Because at least some checks were made out to Mr. Madoff personally, how could investors have understood what they were investing in? Based on news reports, it appears it was the promise of steady and high returns that were “too good to be true”. Staying informed would have also been very helpful, but how does one stay informed on investments that were not properly understood in the first place?
While Mr. Madoff has admitted publicly that his chosen behaviors will likely cause innocent investors to lose billions of dollars, if someone chooses to break the four rules that we have highlighted above, they are also choosing to take risks beyond their ability to calculate. This makes them vulnerable to the schemes of others.
All of this is clearly a circumstance of wrongdoing. But it would not have been possible if so many investors were not in search of a “free lunch”. Very sad, but true. And most astonishing of all is the number of institutional (professional) investors who also drank from Mr. Madoff’s cup.
© 2008, CHANNER INVESTMENT MANAGEMENT, INC.
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