Learning from The Madoff Victims

A new  book is out on the Bernie Madoff scam, The Club No On Wanted To Join. It is a compilation by Alexandra Roth (a Madoff victim) of the words of many who lost  because of Madoff.

The victims included many who were retired, and had to seek new ways to generate income at an advanced age. Although the media portrayed the victims as the super wealthy, and there were those, there also were others who scraped up as little as $30,000 and invested with Madoff through feeder funds.

This book is haunting in the sense that most people did some level of due diligence before investing with Madoff, or invested only after being advised to do so by a person they trusted. They felt comfortable in the investment. These were not blind greedy people. They weren't seeking an outrageous gain that made no sense.

In thinking about the victims, it is hard to see what they could have done not to be fooled by Madoff. You would have had to be a very sophisticated investor not to be sucked in by Madoff. On the other hand. how a legitimate audit by the SEC or FINRA could have failed to protect against Madoff shenanigans boggles the mind.

Thus, there is a lesson for us all here. Never put all your eggs in one basket. In fact, I recommend for most that at least 50% of all money be put aside for investment  in four separate categories as outlined in the book by Harry Browne, Fail-Safe Investing. After you have half your assets set up the way Browne suggests, then it is fine to try other investments, but even in this half of your portfolio you should have at least four completely different investments.

There's another reason to read The Club No One Wanted To Join,  for those interested in studying how people cope with huge changes in financial circumstances. In that sense this book is truly inspiring. The story of Robert Halio and his wife, as well as the story of many others is incredible. He was retired and lost 95% of his money to Madoff. He couldn't get a job in his old career, so has gone to driving people around and building quite a business doing so. There are other stories like this in the book. If things are tough for you because of the Great Recession, pick this book up and find how difficult things can be, and how people pick themselves up after the intial shock.

One also hopes that this book becomes a standard reading in schools that teach those who will become money managers. With this book you get a really hard dose of how Bernie Madoff damaged a lot of peoples lives. Maybe some future money manager after reading this will realize the damage  of  stepping over the line can cause, and maybe, just maybe, stop himself before its to late.

And finally, this book is a great antidote for those who think government agencies will be there to protect them. These people found out the hard way that the government agencies, the SEC and SIPC, and the quasi-government agency, FINRA, are a joke and do nothing but protect their turf.

As victim Roth put it:

We have come to the unavoidable conclusion, that there is no one looking out for the small/average investor. Not the SEC, not SIPC, not FINRA, no one. In fact they try to protect themselves from the investors.

But most of all this is about haunting financial loss and recovery, Maureen Ebel wrote in part to Madoff that is included in the book:

I was left with what was in my wallet and what was in my checking account.

You did not destroy my faith in humanity because I have received so much generosity and kindness from so many. I became poor, and at the same time I became rich in the knowledge of people's goodness.

There are few books like this around. And as I said, up and coming money mangers should be the first in line to read this book.

But for the rest of us it is a reminder to be alert, with interest rates as  low as they are there are likely to be many mini-Madoff's operating and promising a better return.