The rich and their money...

The New York Times has an article by Paul Sullivan about Madoff and those whose money he took:

Bernard L. Madoff, the Cheshire cat of financial swindlers, did what advisers to the very rich only dream about: he persuaded them to hand over a huge percentage of their net worth with less due diligence than they would do before purchasing a launch for their yacht. Private banks wine and dine prospective clients, hold seminars for their children in exotic locales, offer them financing for everything a very rich person has to own — yachts, jets, sports teams — and still they are likely to get only a small percentage of a person’s assets to manage.
Yet Mr. Madoff, the picture of wealth and health, took the opposite approach. He was a sphinx, and instead of trying to solve his riddle, some of the wealthiest people in America, Europe and Asia primped and posed in the hope that he would select them to feed into his Rube Goldberg machine. If only his clients had given a bit more to the private banker waving United States Open tickets.
With hindsight, it is easy to say how foolishly those who invested in his fund acted — easy, but unfair. What he constructed was the investing equivalent of putting a red rope in front of an empty club and then letting no one in. He didn’t dream up impenetrable financial products; he offered consistently better-than-average returns. Who wouldn’t want that?
Delivering 20 percent every year for 30 years would have been too hard to believe (and pay out) while 5 percent would have sent most people searching for more elsewhere. Returning 10 to 12 percent year after year was a stroke of genius: it was within the realm of possibility, if just barely.
The point is that the mistakes his investors made are ones that anyone could make. While the stories of so much money lost are tragic, none had to occur. Much of this loss could have been prevented if people had questioned what they were doing.
THE 10 PERCENT RULE The saddest Madoff stories are the ones about life savings lost. These were people who had, say, $5 million in one of his funds and now have nothing. Honestly, the people themselves need to bear some responsibility for this. The most basic book on investing will tell you never to put more than 5 or 10 percent into any one investment, particularly one meant to preserve wealth.
In 2008, of course, a diversified portfolio did not protect people from loss — stocks and bonds, both here and abroad, all suffered. But a well-balanced portfolio did prevent financial ruin. A little bit of Lehman Brothers or Fannie Mae could be absorbed; vast concentrated positions could not be.
Having a concentrated stock position when you’re working for a company is sometimes unavoidable. If you were a senior executive at Lehman or Bear Stearns, a part of your bonus was paid in shares, and such restricted stock needs to be held for a period of time, generally two to seven years. Having a concentrated position in other circumstances, however, is foolish. Any responsible wealth manager works to reduce or hedge a person’s concentrated stock position. With Mr. Madoff, investors went the other way and added money year after year. Discipline is key: stick to 10 percent or less and remember that any investment can go bust.
CONSISTENCY IS BAD Even the New York Yankees don’t win the World Series every year (at least not anymore). And if anyone should have known this, it should have been Fred Wilpon, the owner of their crosstown rival, the Mets. For the last two seasons, he put together stunning teams, loaded with sluggers, fielders and ace pitchers, only to watch them collapse in the last weeks of the season.
What does this have to do with Mr. Madoff? It shows that consistency at the highest level isn’t bad; it’s impossible. There are too many variables that inhibit being great on a regular basis. Yet Mr. Wilpon, through his Sterling Equities, suffered undisclosed but reportedly significant losses from Mr. Madoff. It defies logic that someone so well versed in a market with as many unforeseeable glitches as baseball would believe that an equally imperfect world — investing — could be so steady.
This is where the people who suspected his fraud are gloating. Aksia, a research firm, released a letter the day Mr. Madoff was arrested that ticked off the warning signs. One of the biggest was the impossibility of the gains claimed by Mr. Madoff’s fund. “Its returns could not be nearly replicated by our quant analyst,” the letter said.
Good investment advisers plan for a modest return over the years. They know that one year they will get you 11 percent, the next year 6 percent and the year after that lose you 2 percent — so count on 5 percent. Mr. Madoff’s returns were too good to be true, but no one wanted to believe that.
THE GRAND FALLOON Kurt Vonnegut coined this phrase in “Cat’s Cradle,” and never did it have a more devastating application than in the Madoff scheme. In Vonnegut’s world, a grand falloon was a false association mistaken for friendship — two people from the same town, same university, same company meet somewhere and believe that coincidental connection has significant meaning. It doesn’t, no more so than belonging to the Palm Beach Country Club or the Fifth Avenue Synagogue did for those who used their proximity to Mr. Madoff to coax him into taking their money.
This is a crucial point particularly in opaque investments, from hedge funds to private equity partnerships: just because someone is a good golfer does not mean he should be trusted to invest your money. Private bankers are forever telling their clients not to try to get into someone’s hedge fund just because you enjoyed their conversation on the course — or, worse, want to play with them again. Like taking care of your health, picking an investment adviser should be done with the utmost rigor. However much you’ve amassed over a lifetime doesn’t mean you can be any less careful: what took decades to build can disappear over night. Just look at the United States stock market: six years of gains were wiped out in 2008.
‘DON’T ASK, DON’T TELL’ As much as the steady returns were enticing, Mr. Madoff’s investors wanted to bask in the glow of being part of such an elite, select group. They didn’t ask enough questions and seemingly assumed the person who got them in had vetted him. But nothing in which you are putting millions of dollars is so wonderful that it cannot withstand scrutiny.
Even more difficult to grasp was why investors didn’t ask more questions of the feeder funds that were channeling money to Mr. Madoff. Why didn’t anyone want to know more about Walter Noel and his investing strategy at Fairfield Greenwich? He lost $7.3 billion of client money to Mr. Madoff, collecting huge management fees for doing little more than passing money along to him. Again, those investors, like Aksia, who asked questions walked away without giving Mr. Madoff their money. They may have been excluded from his club, but they still have their money.
PUT MONEY IN BUCKETS Mortimer Zuckerman, the real estate developer and owner of The Daily News of New York, lost $30 million the right way — through his charitable foundation. As harsh as this may sound for the charity’s beneficiaries, he seems to have followed the popular wisdom of private bank investment strategists: divide your money into buckets to insure the money you need to live on will always be safe. Of course, Mr. Zuckerman may have gotten lucky in not losing money he depended on to live. Most strategists advise putting your riskiest assets into your philanthropy bucket — and so many people believed investing with Mr. Madoff was as safe as it got.

Rico has a friend in the investment game; too bad he isn't into fleecing people, because it seems to be not very hard to do...