MADOFF: The Monster of Wall Street - A Tale Investors Should Learn From

MADOFF: The Monster of Wall Street
What this tale of Wall Street’s largest Ponzi scheme, perpetrated by the infamous Bernie Madoff, should teach investors.

I highly recommend this docuseries on Netflix. There is entertainment, intrigue, and most importantly, Bernie Madoff's story can teach investors a few important things to consider before they hire someone to manage their money:

1. Where is your money being held. You should not be giving a money manager direct access to your account. Instead, your funds should be in your name and housed at a custodian. A custodian is a financial institution that holds customers securities for safekeeping to prevent them from being stolen or lost. Custodians tend to be large reputable firms such as banks. Large, well-known custodians are: Bank of New York (BNY) Mellon, Pershing, JPMorgan Chase, Schwab, T.D. Ameritrade. There are plenty of other reputable custodians, but be sure to do your due diligence.

2. What is the investment strategy. Throughout the entire documentary, Madoff refused to explain his “strategy”. Investing successfully does not require a top-secret decoder ring nor is it reinventing the wheel. New strategies are not being developed and implemented each day or week. Rather, time and time again the single strategy that works consistently is to buy and hold and grow your money with the market. This is the strategy I encourage for self-directed investors and implement with my own clients. If there is another strategy either being proposed or insinuated (and not explained), this is a red flag.

3. Complexity does not indicate breadth of knowledge. Madoff not only refused to explain his strategy when questioned, but insinuated it was very complex and proprietary. Ironically, he claimed such complexities existed solely to hide what was only the most basic robbery—robbing Peter to pay Paul. On a much smaller scale, I often see complexity built into client portfolios by managers as a means of “proving” their worth. At Chisholm, because our asset management services include comprehensive financial planning so our value is inherent in working with us. We keep our portfolios simple, low cost, and straightforward. At the end of the day, if your investment advisor cannot easily explain to you what your portfolio is holding and why the returns are as they are it’s time to move on.

4. Are the portfolio returns reflective of the broader market. Bernie Madoff claimed to make great returns consistently, even during periods of down markets. With the exception of a lucky stock pick, which I compare to betting on the right horse at the track, an investment manager will not consistently beat the market; If he or she is claiming some clairvoyance that the rest of the market does not have, something is not right. When we discuss investment portfolios with clients, we are open and honest about how they will fair in up and down markets and make sure the client knows that investment growth requires various levels of risk, and down cycles of the market.

There are a few other takeaways I will touch on in this lives stream, but they are more subjective. I will touch on:
1. Virtue and how it relates to the earning and investing of money is an important topic, and one I think is overlooked.
2. The sad choice that Madoff made, willingly, to go down the wrong path. Imagine what his life could have been had he made the right choices.