When life gives you lemons, make lemonade.? Over two dozen people that survived losing a lot of their money in the Madoff Ponzi scheme wrote down their stories.? For one thing, I’m sure it was cathartic to do so.? Something that many regarded as being one of the most dependable parts of their lives ended up proving utterly undependable.
Out of loss, many of the writers rediscovered the simpler joys of life — family and friends.? Even new friends, as many of them banded together to figure out which end was up.
The tales that the authors tell are not identical, but they certainly rhymed.? Here would be my stylized example of the outline of one of their stories:
- Growing up in a lower-to-middle class family
- Being taught to work hard and be frugal
- Achieved some degree of success
- Was not sure what to do as the excess assets grew
- A family member or friend introduced me to Madoff
- Looked like a smart deal; Madoff always seemed to do well, so the person put most to all of his investable assets there.
- Sometimes even borrowed money rather than tap the Madoff funds.
- Life was good; he was charitable, enjoyed life, was generous with friends.
- The shock came that Madoff was a fraud, a Ponzi scheme.
- Adding insult to injury, learned that the SIPC would not pay off much at all of the losses, seemingly contrary to their prior actions in other cases.
- The best option for many was to file as a total loss, and recover back taxes.
- Retirement dreams turned back to work, and who would hire an old person?
- Friends and family often proved helpful, but it is hard to go from being a giver to being dependent.
Personally I would like to meet most of these people, give them a hug, and affirm to them that true wealth isn’t money, but relationships.? Poor people are poor because they lack the connections the they can trust, and have the power to help them.
Now, I don’t want to say they should not have seen this coming.? This blog is about risk control in investing.? Remember, you are your own best defender when it comes to investing, and saying “no” is almost always safer than saying “yes.”? Let me quote from a piece written near the time that Madoff was sent off to the pokey:
The sad aspect of plumbing for the financial markets today is that we are drawn to the front end of investing processes.? This man looks successful.? He has a great story; a way to make money that others do not know about.? There are documents showing his track record ? impressive, though he doesn?t solicit publicly; investing with him is a family affair.? Do you want to be part of the family and gain the benefits thereof?
There are questions to be asked, particularly of nonstandard ventures:
- How are the returns earned?
- Who checks the results?? (Auditing ? should not be a small firm.)
- Who has custody of the assets?
- Is the trustee a reputable third party?
- Is liquidity proportionate to the asset class invested in?
- Is this under US law?
- Do the returns look too good to be true, either in absolute amount, or always positive with low volatility?
- Is this marketed to everyone, or just a select few suckers?
- Is the profit motive of the sponsor obvious and standard?
- How are asset values calculated each accounting period?
Whether we are talking about Madoff, Stanford, or any of the other recent frauds, an attention to the details of how the financial plumbing works can pay off in terms of avoiding situations that are too good to be true.
You are ultimately responsible for losses that you receive.? Yes, no one can know everything, but if you don’t have any idea of how someone investing for you is making money, you probably should not invest with that person, because you are incapable of evaluating what they do in broad.
No one with a serious risk control discipline invested with Madoff or Stanford.? These are cases where paying a little for expert help would have paid off big.
Does that mean I look down on those that lost?? Not at all.? Most ordinary investors don’t have the vaguest idea what they are doing.? They are blessed because no one they knew would introduce them to Madoff.? For those that lost, I only have sorrow and pity.? I wish that you had friends and family that would have steered you better.? We all rely on friends, but there is still a danger in that reliance.
Quibbles
As I read more of the book, it felt like some of the authors had rehearsed story lines with each other.? Now, that is natural, because they talked with each other and planned strategy together regarding the SIPC and other hurdles.? So, I don’t begrudge that much.
What I do begrudge is the 8-page investment “analysis” at the end of the book that says that no one should have been suspicious of an 11%/year return, because equity funds from many major mutual fund companies earned 11%/year over the same period.? Total hooey.? Few would have invested with Madoff given the lack of disclosure had not the returns been so regular on a monthly basis.? The mutual funds had large runs up, and large drawdowns.? Investors, not savers, would buy such mutual funds.? The attraction of Madoff’s scam was that it was designed for savers, not investors.? No volatility, high returns, no worries.? Thus someone with the personality of a saver could put money there, and not worry, because Uncle Bernie was a genius who was taking care of them.
And indeed, Madoff took care of them, with malice.? The underfunded SIPC could do little to help, given the enormity of the fraud.
Who would benefit from this book
Anyone who wants to sympathize with and support those who lost to Madoff would benefit from this book.? It does a fairly complete job, and is not long at ~230 pages.? As I write this it is, out of stock at Amazon, but when available, you can buy it here: The Club No One Wanted To Join-Madoff Victims In Their Own Words Barnes & Noble does have copies.
Full disclosure: An author sent me a copy, after asking if I would like to receive a review copy.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
Sometimes a cursory book review is too quick to pass judgments without understanding the intent of the authors.
Similarly a reviewer all too often jumps to conclusions which are totally unfounded in the facts presented in the book as well as passing baseless judgments on the author?s intent when including those facts.
Such is the case for the reviewer’s comments on “The Club No One Wanted to Join”
In the interest of full disclosure ? I am one of the 29 authors of this book.
I have specific issues with the reviewer?s understanding of why investors placed their money with Madoff as well as with his comments regarding “the investment “analysis”” which was included at the end of the book.
Let?s deal with each issue separately.
Reviewer?s comment “Few would have invested with Madoff given the lack of disclosure had not the returns been so regular on a monthly basis. The attraction of Madoff?s scam was that it was designed for savers, not investors. No volatility, high returns, no worries. Thus someone with the personality of a saver could put money there, and not worry, because Uncle Bernie was a genius who was taking care of them.”
I hardly think that this reviewer is any position to determine why anyone would select BLMIS (Madoff’s firm) as an investment vehicle. There were over 4,000 investors with managed brokerage accounts and hundreds of mutual funds (which had tens of thousands of individuals) invested with Madoff. Each investor and each mutual fund was making a reasoned investment decision which compared the product offered by BLMIS vs the competition. Does the reviewer really believe that all of these individuals and investment entities were “savers” and “not investors?” I have to wonder if this reviewer even heard of “the split strike conversion” strategy marketed by Madoff as THE reason why returns would have low volatility and why this approach would be of such value to an INVESTOR who is making long term plans and not trying to hit it big and reaching for an investment program which promised really high returns. SAVERS buy CDs, INVESTORS buy stocks. Madoff investors, both individuals and mutual funds were clearly investors.
Reviewer?s comment “What I do begrudge is the 8-page investment ?analysis? at the end of the book that says that no one should have been suspicious of an 11%/year return, because equity funds from many major mutual fund companies earned 11%/year over the same period. Total hooey.?
I have to wonder if the ?total hooey? comment is related to the reliability of the return comparison or the reviewer?s perception of SAVERS versus INVESTORS. If indeed the comment is related to the numbers themselves then the reviewer should have rebutted a statistical analysis with a dissent which is founded in numbers.
Much has been said in the press that ?Madoff investors should have known better? but this analysis suggests that Madoff did not report returns that would raise red flags to his investors. If this reviewer suggests that this return reliability should have raised red flags then I assume the reviewer would similarly suggest Warren Buffett (chairman of Berkshire Hathaway) is a possible charlatan and his investors are likewise ?savers? since Buffett has not had a losing year in many, many years. Buffett is just a superior investor and money manager ? exactly the same reputation as Madoff.
The intent of the author of this section was to compare the returns reported by Madoff as being in line with what an investor could expect by a long term investment in many mutual funds.
I am a statistician, I wonder if the reviewer has any similar credentials to support the ?total hooey? comment in his review.