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Investors can learn lessons from Madoff

Wow, what a last few weeks. If you spent some of it like I did watching the myriad images march across the TV screen — I was sick in bed with bronchitis — you saw everything from the death of a pop icon and a Hollywood star to the pomp and circumstance of the Bernie Madoff trial.

So much excitement I felt like I might have a relapse.

In my book, even the hoopla surrounding Michael Jackson and Farrah Fawcett couldn’t rival the seaminess, tragedy and sordidness of the conviction of Madoff, the 71-year-old swindler who brought thousands from riches to rags with nary a tear and barely an apology.

The idea that someone who had such a stellar reputation in the financial world for so long could end up being such a wolf in sheep’s clothing with his hand in everyone’s pocket is amazing.

And the questions still linger. How could, in many cases, wise and knowledgeable investors be swindled so royally? How could one man accomplish such extensive damage for so long under the eyes of federal authorities? How will all those who lost their life savings survive?

Talking with some local financial advisers, I realized how much others who were in no way connected to the scam have suffered. The taint of Madoff’s crime has tarnished the financial industry and created distrust of financial experts who had nothing to do with his twisted scheme.

Putting your money in the hands of someone all comes down to trust. Do you believe in the adviser you are talking to, believe he or she has your best interests at heart, think he or she is fundamentally moral and ethical?

“Usually in the first five minutes, you get a gut feeling whether you can trust someone,” said Tom Kubik, one of our investment columnists and the president of Kubik Financial Services in Bradenton. “It all comes down to who you can trust and who you can’t trust.”

Yet watching last week’s Madoff stories unfold, it seems there were hundreds if not thousands of investors who knew the former NASDAQ chairman personally or was recommended by a friend or relative and placed their life savings in his hands.

When money is involved, greed is not far behind. And in this case, it seems greed superseded common sense. Many of these seemingly financially savvy people suspended good judgment, ignored red flags and plunked their money down while drooling at the idea of consistent high-percentage interest yields.

Many apparently believed Madoff was a financial genius who could do no wrong. He had an “edge” or a ”magic touch” that transcended any dips in the market.

All this, however, smacks of what everyone from my mother to ancient sages always warn you against: “If it sounds too good to be true, it probably isn’t.”

In Madoff’s case, investors consistently received above-market returns regardless of the volatility of Wall Street. Many of the investors also had all their eggs in one basket, violating the cardinal rule of investment strategy: diversification.

Almost all of the financial advisers I know believe their industry is overregulated as it is. They have so many compliance issues and oversights that it would be almost impossible for someone at a major brokerage firm to steal money and get away with it.

Kris Flammang, another Herald columnist and an adviser with LPF Financial Advisors, said he is constantly fielding questions from sceptical investors.

“Prior to this (Madoff), I rarely fielded a question. Now probably one out of three people are asking questions like ‘How do we know our money is protected because we don’t want to have the Madoff thing happening to us.’”

More are expected to be indicted in this case. I’m sure Madoff wasn’t working alone. But investors should take away some hard-won lessons from this case.

Keep your feet firmly planted on the ground, and don’t expect miracles when it comes to investing your money.