Hopefully, you have heard of Bernie Madoff. If not, google him. All investors should be aware of Bernie and his escapades.
John Authers, writes in Bloomberg, how Bernie Madoff fooled the world. Why now? Bernie has died in prison.
Why should you care? John concludes with this statement “Regulatory changes in the wake of Madoff have been minimal. And so perhaps the most sobering thought as he leaves is that without the once-in-a-century crisis of 2008 he might well have died without ever being detected.” Just think about Woodford as well. The point is you have to be vigilant with your money. The chances are you’ll be fine and you will not experience people like Madoff and Woodford, but you could. It is a risk.
John states “Consistency was his distinction, rather than anything spectacular. Everyone knows the cliche that if something looks too good to be true, it probably is. Judged in its totality, Madoff’s investment record was far too good to be true. But no one year ever looked that great. He simply continued compounding his “gains” at a rate of 10% or thereabouts, year after year. He never claimed to do better, even if the market was up 20%. It was only after he had been operating for many years that statisticians could call foul.”
When existing investors wanted their money back, Madoff paid them out. This means there was nothing that alarmed investors whilst they were invested. The value of their investments didn’t seem spectacular, but over time, they were making good positive returns. Yet investors failed to ask how Madoff was investing their money? If they did ask, the questions were certainly not good enough. People may say, it’s easy to be wise after the event, but that’s an excuse for not carrying out thorough due diligence. Those that buried their heads accepting what appeared good returns lost out. Madoff was a great salesperson. There are many great salespeople in finance, but they are not crooked. And whilst the risks of you meeting another Madoff are slight, the risks of you meeting a great salesperson are high, and you may not recognise the impact of “compounding” over time. Simply, they are no warning flags. The moral is staying vigilant. Asking good questions about your money. And rather than being lazy about your money on the basis of it seems fine for everyone else, it’s called the Lemming Effect, remember it’s your money you are responsible for, and most likely your family’s money and future as well.