Madoff / Aspen .... ---sigh---

This mishap should serve as a reminder to all of us investors that you need to perform your due diligence on any potential investments. Also, never trust anybody that tells you of an investment vehicle that pays really high returns and is only "for the selected few". Madoff used that to lure thousands of "investors".

 

And, more than anything, to diversify!!!

 

Due dili only goes so far. The key to preventing this from happening to YOU is what ddemuro said: diversification. While due dili MIGHT have uncovered red flags, most investors honestly don't have the skills, contacts or access to information to properly screen a sophisticated scam like Madoff's. However, I've come across my fair share of frauds over the years, and I'm always extra gun shy. To my own detriment at times.

Anyway, I was on the lift on Sunday with a fellow from NY who has known Madoff for 30 years. On his street alone in the Hamptons, his neighbors have lost nearly $700MM. Shocking and mind-boggling.

CW

 

Yep that is exactly correct, diversify your assets/investments will keep you safer than putting all your "eggs in one basket".

This whole Madoff thing is just sickening and I am sure we'll hear more of the effects as time goes. The next big question is where did all this money go?

 

Oddly enough, you could argue that most went to the IRS.

Investors put capital into the deal, their capital being composed of accumulated post tax income. The pyramid operator takes the capital and uses it to pay out income to his early investors. The IRS taxes this income and all are happy until an ebbing tide ruins the scheme and the investors end up on the rocks.

The HSBC has a billion with him. At, say 10%, Madoff had to pay them $100 million every year to keep them happy. You need a lot of people filling the bottom of the pyramid to find that sort of cash.

You know, the whole trick with a pyramid scheme is to let it outlive you, that way it will be seen as a plausible enterprise. Lord Keynes was once asked what the long term result would be for his inflationary economic policies. “In the long term we are all dead,” he replied. Well, he is dead and we are not, so with that in mind give a moment’s thought to the Social Security system. How does it differ from a multigenerational Ponzi scheme?

Please send all correct answers to Congress.

 

Keep in mind that as long as the population continues to grow - and the amount of money put into it by each participant grows at a proportional rate along with it - a Ponzi scheme will last forever. Social Security, in theory, could be exactly like that - it just isn't.

 

We know a couple who got hit by Madoff. He is a contractor, she a volunteer at the hospital.
They are selling their house in Aspen and moving down valley. And she is getting a paying job.

A local RE broker estimated in the paper that 50 to 100 families were effected and they will be selling their RE because they need to raise maoney fast.

Since 70% of real estate is a cash sale most will get all the proceeds of the sale as there is usually no mortgage.

Diversify is a must. But when things are too easy you are cruisin' for a bruisin'.

Guess this is Darwin's way of separating money from those who can't manage it. You are taking enough risk in the markets (stocks down 40% this year) without doing business with crooks.

Sorry.

 

Anyone with the resources to invest with someone like Madoff has the resources to get proper due diligence performed. If the individual is not equipped to do it themselves, they can always hire an investment consulting firm like CTC, Monticello, Windermere, etc to do it for them. The fact that many do not perform proper DD sucks for them, but proper due diligence can keep you out of most of these types of deals. I've seen a few up close and the lack of DD is a common denominator in all that I have personally seen.

I agree with the diversification aspect as well. I would expect someone with $50-100mm in assets to have at least 10-15 managers running their money, if not more.

 

I just re-read my post and I came across a bit callous. I do feel for those who lost money with Madoff, and my heart really goes out to those who lost damn near everything. I was just trying to show how due diligence is available for those with the kind of assets to invest with someone like Madoff.

 

There were a LOT of people who were in the $500K - $1MM range from what I've heard, which is probably too small to justify hiring a due diligence firm. It isn't a guarantee, either. And, a number of people who were in his funds indicated that nothing seemed amiss. How deep do you dig and how much do you spend doing it? The small investor often piggybacks on the work performed by the larger ones (rational ignorance), and if large institutions were investing with Madoff that would likely put small investors at ease.

Even the SEC didn't catch this fraud.

CW

 

If all you have is $500k-1mm to invest, you should not be in hedge funds, IMO. Even hedge funds that do not involve fraud blow up occasionally. I've seen it happen. A strategy that works well in stable markets can quickly unravel in turbulent markets. All the backtesting in the world can't guarantee your strategy can survive crazy markets.