Somewhere among the moneyed elite, you may have heard the following conversations:
“I hear you want to invest, am I correct? Well, tell me about yourself. What are your credentials?
Gobs of money, Check., (nice Bentley in the driveway, by the way).
Charitably inclined, Check.
Part of the right community, Check.
Where do you live? Oh, there? Check.
Okay, so who do you know? No kidding…Check.
Well, I’ll tell you what. You got a million to invest? Why don’t you start with $200,000 and we’ll go from there. See if we get along, okay? Yes, yes, yes, you’re welcome–don’t mention it. I’m happy to do a favor for one of our kind.”
From all accounts, these were the conversations going on in exclusive hotels and country clubs around the world. The person talking is Bernard Madoff (Bernie to his friends) and his minions. This is a small part of the story that is unfolding as the days pass by. The story of the largest Ponzi scheme in history. $50 billion dollars of history.
It is said that Steven Spielberg was an investor with Madoff. It would seem that he had a close encounter of the 3rd kind, which, by definition, is direct contact. I, on the other hand, had a close encounter of the 1st kind, which is a sighting of odd lights and objects not attributable to human technology. My sighting came 10 years ago, when a CPA asked me to comment and review the returns of a very successful money manager. One of his clients was very excited by the possibility of investing with this manager. What bothered the CPA and subsequently bothered me, was the questionable consistency of the returns. Records showed gains of 10-15% per year; year in and year out. Not a single year of negative returns. I looked over the material and stated bluntly that this was not possible, and I advised him to pass on this. Luckily, he did.
This, for me, was a simple observation. I had never seen or heard of anyone who could invest like this, and having read many books about the world’s greatest investors, I knew the basic rules of the stock market, one of which can be explained by the following metaphor: “If you’re in a boat, and the boat is in the water, when the tide goes out, you have to go out with it”. In other words, if you are invested in the Stock Market, it is impossible to get in and out of the market consistently and successfully over any long period of time. Because of the laws of financial physics, it is impossible. Like gravity, what goes up must come down.
How did so many people get fooled? Everyone is asking themselves the same question. How could so many people entrust their entire savings to one person? Even a few professionals were fooled and they should have known better. Professionals know how to diversify appropriately. They know that one manager, even with very good investment results; will lose money at some time. It takes a well diversified portfolio to protect you from this fact.
