“YOU ONLY FALL FOR LIES AND STORIES WHEN YOU REALLY WANT TO”

12/18/08

One of the hot topics on CNBC today was the Bernie Madoff Ponzi scheme that entrapped perhaps thousands of, by SEC definition, “sophisticated” investors and cost billions of dollars. (See my 12/12/08 post, BUT HE BELONGED TO BOCA RIO AND FRESH MEADOWS!) One of the experts consulted on this development was a reporter from the Financial Times whose name I didn’t catch. She was outlining the breadth and depth of this financial fiasco, mentioning the loss of faith in the markets it would engender, the many charities that would be hurt, or worse, and the fact that some of the (once) wealthy victims might be forced to (Gasp!) sell their homes due to the losses that they had incurred from trusting Bernie Madoff.

Unless one has an inexhaustible well of sympathy, it is hard to expend much of it on the people who lost money investing with Bernie Madoff. Yes, some might lose their Palm Beach homes or their Manhattan townhouses, but these were, for the most part, accomplished, smart people who should have known better. A lot of people who were far less worldly, sophisticated, and wealthy than Madoff’s investors (people who, by the way, would not get a second look from Mr. Madoff because their “investable funds” were so paltry) have lost and will lose their homes, and everything else (materially), due to the financial crisis we are currently experiencing, and almost none of these people is anywhere near entirely blameless, as readers of the IP know. Madoff’s groupies were, after all, “sophisticated” investors (by SEC definition and certainly in their own minds until, of course, the bottom fell out and they started grasping for victimhood status) who would not sully their hands with such plebeian investments as dumb old index funds or CDs. Why waste their time, and mix with the common folk, when they could travel in the rarefied company of Bernie Madoff?

Okay, so not all of Bernie’s investors were heartless snobs who felt that normal investing was beneath them when they could be part of the Madoff crowd. Many, perhaps most, doubtless were good people. But all either had something on the ball (like Mr. Carl Shapiro, a 95 year old apparel entrepreneur who amassed a self-made fortune of approximately $500mm and who had been investing with Madoff for decades) or had stumbled on a fortune in the ways that are becoming more fashionable and common among Americans who like to argue that, yes, indeed, capitalism really works: they were born on third base or knew somebody who knew somebody who put them on third base and thought they hit the triple. In the case of Mr. Madoff’s investors who were really accomplished and/or smart, they should have done their homework and had the courage to ask questions, pull their money, or at least diversify. In the case of those Madoff investors who either inherited or lucked into their money…oh well.

What about the charities that have been hurt by Big Hearted Bernie? Am I so heartless that I care little about them? Of course not. The beneficiaries of these charities are the true innocent victims here. But among the true miscreants, along with Mr. Madoff, are the people who run these charities. Charities hire “experts,” who are paid very big salaries, to screen and analyze investments. And even the people in charge of these charities, the people who hire these financial “experts,” generally pay themselves handsomely to steward the funds with which they are entrusted. Nobody earns his or her salary, or the trust of the donors or beneficiaries of these charities, by hiring experts on the basis of “…his parents belong to our club” who in turn choose investments on the basis “…my brother-in-law played golf with him the other day, and he says he’ll let us invest with him if we don’t ask any questions.”

Investing is not a case of putting your money in the hands of someone who knows someone you know or who travels in the right circles. I am not naïve; I realize that much, if not most, business in this country is done on the basis of personal relationships. But an introduction should be only the beginning of the process, not the end of the process. We might (though we shouldn’t) limit our consideration to those who have been introduced to us, but, even after the introduction, there is still consideration, in the form of research, to be done. We should rely on our brains, or at least our common sense, when making investment decisions. And we shouldn’t rely on sympathy, or a government handout (You know such a bailout, or at least a full court press for it, is coming in this case.), when we don’t.