Bernie Madoff is a gift that keeps on giving.More than a year after his nefarious Ponzi Scheme was discovered to have bilked more than $50 billion from his clients, Madoff’s name still pops up regularly in the media.
Last week, a court struck down a claim by Madoff investors who sought to increase the mitigating settlement they are entitled to from the Securities Investor Protection Corp.
Their argument is that they should recover a share of the seized assets equal to the amount their last balance sheet claimed, as opposed to a calculation of how much money they actually paid in.
Parallel to the court ruling, legislation has been filed by U.S. Rep. Scott Garrett, R-N.J., that would require the SIPC to make reimbursements based on account statements, not actual outlay.
Last week, there were also reports that Madoff’s wife of 52 years, Ruth, will seek a divorce while her husband languishes behind bars, serving a 150-year prison sentence.
Make no mistake, Madoff was a crook — something long since proven by prosecutors and his own confessions. But seeing his name in headlines once again had us wondering if, despite his years of con artistry, Madoff’s career may still offer some valuable ideas and advice.
The “confidence” part of Madoff’s confidence scheme came from the fact that he was, at one time, a powerful figure in finance.
Before the Ponzi bug bit, he was apparently very good at what he did. In 1959, at the age of 21, he started Bernard L. Madoff Investment Securities with just $200 (although that claim has been challenged; the seed money may have been closer to $55,000) and, registered as a securities broker-dealer with the SEC, bought and sold penny stocks.
According to SEC filings, that business was valued at $1.1 million by 1973. The firm, over time, became one of the top market makers on Wall Street.
Madoff had friends in high places and status among Wall Street’s elite. He was never questioned, in large part, because his stature made him nearly bullet-proof. In large part, he achieved that position of prestige because he said all the right things. Whether he followed his own ivory tower thinking is the crux of the scandal, but are there some valuable investing tips to be found?
We stress that none of this is intended to make Madoff “look good.” But, as they say, even a broken clock is right twice a day. In that spirit, we looked at what takeaways investors may have benefited from in the days when Madoff deluded himself and others into thinking he was a guru.
Don’t overthink your moves
Going with your gut may not be great investment advice for most, but neither is paralysis by analysis.
Madoff, in a 2007 roundtable discussion immortalised on YouTube, says that at the urging of his wife he once hired young graduates of MIT with degrees in mathematics, a change from the MBA students he normally chose.
“We didn’t have much success … they spend too much time thinking,” he said. “They would deliver an order, they’d now own 1,100 shares of IBM and you’d see them [tilts head back, eyes shut as if in deep thought]. By [the time they acted] the price had moved against us.”
“For the average investor, if you are investing for your retirement or whatever, you don’t have to get involved in all these insane moves that occur in the marketplace … You don’t have to get preoccupied with that sort of stuff,” he added.
Of course, that might be easy for a guy who rigged seemingly spectacular and unwavering returns for his clients to say.
It’s a dog-eat-dog world
“Wall Street is one big turf war,” Madoff said during the discussion. “By benefiting one person, you are disadvantaging another person. The basic concept of Wall Street, which sometimes the regulators lose sight of, as do the academics, is that it is a for-profit enterprise. The person buying a share of stock is convinced that he knows something that the other person who is selling it to him does not. There is no zero-sum game on Wall Street.”
Don’t get emotional
It is by now a cliche to hear advisers — particularly those who work in retirement planning — remind us that the average investor should be focused on long-term results and not act rashly when confronted by either periodic cycles or startling dips and pops.
We’ve heard that advice a lot more in recent weeks, given the current, volatile nature of the marketplace.
Keeping your eye on the ball and not giving into panic is good advice, even if it comes from a suspect source such as Madoff.
Investing, as he saw it, was never as fast-paced or reactive as it is today.
“Investing has gotten so fast because the average person used to go home, read the newspapers, or read a research report, or speak to his broker … that took time and was a slow process,” he said in that same roundtable discussion.
He later delved further into why fluctuations shouldn’t be a top-of-mind concern for individual investors.
“The fact that the market goes up or down 300 points is a scary event,” he said. “There’s this feeling of doom, a feeling that there is something going on that you don’t know about. But take my word for it, you can ignore all those moves, because if you go back historically and you look at the long-term performance of all the marketplaces … you would be fine had you just held on.”
You can mitigate risk
There is no such thing as a risk-free investment. But the shrewd use of options strategies can help protect you from the downside of a trade.
Madoff’s endorsement of using options is solid, even if he was guilty of the very thing that keeps many individuals at bay: making it all sound so complicated.
In essence his strategy (though one that could hardly produce spectacular returns) was to buy selected, sell call options for the same stocks (giving investors the right to buy the stock at a determined price) and use the proceeds from selling the call options to buy put options and the right to sell the stock at a determined price. This strategy allows the buyer to benefit, though marginally, whether a stock goes up or down.
Madoff also claimed to have perfected strategies for protecting against downside, even if much of what he was doing was shuffling money around to, in effect, look busy without truly risking capital. For example, he frequently used derivatives to hedge a portfolio of securities.
Never invest with a strategy you don’t fully understand, but Madoff’s game plans show there are wealth of strategies that go beyond “buy and hold.”
Alas, he ultimately proved investors can’t afford to get in over their head if they don’t understand these complexities. Madoff’s “split-strike conversion” strategy was, at the end of the day, no more than mumbo-jumbo that sounded good to naive investors who never peeked under the hood.
Image is everything
It is a very general bit of advice, but in any profession or business cultivating an air of authority can open a lot of doors.
Before his fall, Madoff glad-handed and schmoozed with so many Wall Street heavyweights that he ultimately was considered one of their own.
His resume, added to year by year, is truly impressive. He was chairman of the board of directors of Nasdaq, a founding member of the board of the International Securities Clearing Corp. in London and was on the board of directors of the Securities Industry Association (now the Securities Industry and Financial Markets Association).
He was also active in philanthropy, with key roles in Yeshiva University’s business school, New York City centre and the American Jewish Congress. Political donations further solidified his position as a power broker who had the ear and favour of the influential.
Madoff, it was discovered, cultivated his power and mystique as a way to attract clients he could bilk. An honest man or woman, however, would do well to follow his example at volunteerism and philanthropy. It can prove valuable, perhaps career-making, networking.