Lessons We Can Learn from the Madoff Scandal
- 2009 13 May
In my mind as a fifth-grader, Mr. James M. Migaki was the smartest man to have ever lived. Every day was special in Mr. Migaki's class. He taught us the importance of learning history so we would never have to repeat its mistakes. He made that lesson real when he said that last year counted as history, and so did last month and last week. Mr. Migaki said something is only a mistake if you can't fix it. Sometimes he would let us re-take our tests to learn from history and fix our mistakes.
Speaking of lessons we can learn from things that went wrong in the past, how about that Bernie Madoff character? He's the guy who, for decades, was ripping people off, claiming to be investing their fortunes, paying them inexplicable returns on their money, and all the while stealing from them blind. There are several important lessons that all of us need to learn for good, while this scandal is fresh in our minds. Following are my top five. If you want to hear more, you can listen my April 2 radio show, "Your Money Solutions on Blog Talk Radio":
1. Know what you own. No matter what type of investment you have, make it your business to know what you own and where your money is. If your fund manager or broker cannot give you an explanation you can understand, that is not a reflection on you. It could be that person is more unsure than you are. Keep asking questions, keep researching, keep digging and don't stop until you can explain what you own through your investment in 25 words or less.
2. Know who's minding the store. Madoff clients were too trusting when they handed their money over to a mysterious stranger. I can imagine that, for some of them, the mystery surrounding the old gent' gave them some kind of weird confidence. That was dumb.
3. Don't fall for unbelievable deals. Remember the old adage: If it's too good to be true, you can bet that it is. Get rid of your lottery mentality. There are no get-rich-quick deals out there. If you think you see one, figure out what it is really. Then run.
4. Trust but verify. I don't know what kind of annual accounting these Madoff clients received, but now we know that it was all fake. A reasonable effort at verifying the returns would have turned up the truth.
5. Don't assume someone else will protect you. No doubt the Madoff crowd assumed they had some kind of protection against getting stung by a scoundrel. After all, most securities professionals and others carry insurance to cover clients in the event of an embezzlement or money scandal. Apparently, the unsuspecting investors in the Madoff scheme never thought to ask about insurance. Whether you think you're protected or not, speak up. Ask the questions, even if you think you might appear dumb.
Perhaps the best thing we can learn from the Madoff caper is this: Dumb questions are a lot better than dumb mistakes.
If you liked this article by Mary Hunt, you'll find lots more in the "Everyday Cheapskate" archives, or subscribe to receive Everyday Cheapskate in your email inbox every weekday. Also, check out Mary's recently released revised and expanded edition of The Financially Confident Woman (DPL Press, 2008).
Debt-Proof Living was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "Debt-Proof Living" is read by close to 100,000 cheapskates. Click here to subscribe. Also, you can receive Mary's free daily e-mail "Everyday Cheapskate" by signing up at EverydayCheapskate.com.
Copyright © 2009 Mary Hunt. All rights reserved. Permission to reprint required.