Posts filed under “Rules”

10 Lessons of Madoff’s Ponzi Scheme

Its been two years since the Madoff crime erupted across headlines. The massive theft punctured what little faith investors  had in the markets, investment firms and regulators.

Fraud rarely has a silver lining, but the least we can do is try to learn from other people’s mistakes. There were many many lessons to be learned from the atrocious theft committed by Bernie Madoff. Those who watch the massive scam unravel should take heed, and consider what lessons could be learned.

Here are my 10 takeaways from the scam:

1. Due Diligence: You must understand what that means, and have the ability to perform it competently. If you do not have the tools to perform adequate due diligence, you should not be invested in any hedge funds, VC, or private equity funds PERIOD.

2. Too good to be true?:  By now, everyone should recognize this: Anything that sounds to good to be true probably is. Low risk, high gain outcomes are extremely low probability. Stop buying lottery tickets, and stop chasing last year’s performance.

3. OPM: Ask yourself who profits from this investment, what interests and conflicts are involved. Is there an  incentivize to take wild risks with other people’s money? Are managers assets at risk along side investor money? Recognize what OPM does to the process.

4. Instincts: Don’t be afraid to rely on your Spidey-Sense if you are skeptical about an investment. If something seems amiss, walk away. Someone doesn’t charge fees? Performance is improbably stable for equities? They give you a Wink Wink Nudge Nudge that something is borderline illegal ?  WALK AWAY

5. Know What You Own: Do not invest in anything you do not understand: How does this make money? What makes this unique? What is the basis for this investment? What are the risks? If you cannot answer those questions, you should not be risking your capital.

6. No Outsourcing: Do not outsource your thinking or due diligence. Do not rely on 3rd parties, fund of funds, lawyers, advisors or consultants. We have learned that most are worthless. What is the value add does this fund manager provide? What are they doing, and should I be doing that myself? This is true for consultants, economists, strategists, traders, and managers.

7. You must not keep all of your money with one manager: I was astonished how many people had all their money with Madoff. If the worst happens, this is a recipe for disaster. Diversify your holdings across several professionals in unrelated firms.

And firms that Self-Clear are simply verboten.

8. People:  Which leads to this you must understand the people of any organization, along with its principles and partners. What are their ethical standards, history, and reputations? Do you know them well enough to know their hobbies, foibles, personal vices?

9. What if you suspect you are in a Ponzi scheme? Withdraw your cash. Send an fax and a registered letter. Never reveal to the scammer why, simply insist upon getting your money back — If you must explain, only say “Its for personal reasons.”  Then you must create meticulous records as to what your contributions were, what your net gains were. Set up a second account for any gains — you must assume that they can be clawed back within a certain number of years.

10. Its Your Money: You are on your own — don’t expect help from the SEC or the media or anyone else. Its your cash and your retirement. You best act that way. I am not seeking to exonerate the many failures of 3rd parties — rather, I am emphasizing that it is your responsibility.

That’s my list; feel free to make your own suggestions . . . .

Category: Investing, Legal, Rules

15 Inviolable Rules for Dealing with Wall Street

The never ending parade of stock scandals seems to continue unabated, the stock lending scam being only the most recent. As history has shown us — from Mexico to Orange County to analyst banking crisis to Derivatives to etc., when the Street comes aknockin, best for you to hide your wallets. For reasons we are…Read More

Category: Apprenticed Investor, Corporate Management, Investing, Really, really bad calls, Rules

Six Rules of Michael Steinhardt

Michael Steinhardt was one of the most successful hedge fund managers of all time. A dollar invested with Steinhardt Partners LP in 1967 was worth $481 when Steinhardt retired in 1995. The following six rules were pulled out from a speech he gave: 1. Make all your mistakes early in life: The more tough lessons…Read More

Category: Apprenticed Investor, Investing, Rules

10 Habits of Mind for Investors

This comes from a math blog by a teacher called WITHOUT GEOMETRY, LIFE IS POINTLESS (get it?).

There is a recent post I wanted to reference — Habits of Mind — that was originally written for math students. With a few small changes, it can be readily adapted to thinking about markets, risk, investing, etc.

Have a go at it:

Habits of mind

1. Pattern Sniff
. . .A. On the lookout for patterns
. . .B. On the lookout for shortcuts

2. Experiment, Guess and Conjecture
. . .A. Can begin to work on a problem independently
. . .B. Estimates
. . .C. Conjectures
. . .D. Healthy skepticism of experimental results
. . .E. Determines lower and upper bounds
. . .F. Looks at small or large cases to find and test conjectures
. . .G. Is thoughtful and purposeful about which case(s) to explore
. . .H. Keeps all but one variable fixed
. . .I. Varies parameters in regular and useful ways
. . .J. Works backwards (guesses at a solution and see if it makes sense)

3. Organize and Simplify
. . .A. Records results in a useful way
. . .B. Process, solutions and answers are detailed and easy to follow
. . .C. Looks at information about the problem or solution in different ways
. . .D. Determine whether the problem can be broken up into simpler pieces
. . .E. Considers the form of data (deciding when, e.g., 1+2 is more helpful than 3)
. . .F. Uses parity and other methods to simplify and classify cases

4. Describe
. . .A. Verbal/visual articulation of thoughts, results, conjectures, arguments, etc.
. . .B. Written articulation of arguments, process, proofs, questions, opinions, etc.
. . .C. Can explain both how and why
. . .D. Creates precise problems
. . .E. Invents notation and language when helpful
. . .F. Ensures that this invented notation and language is precise

Read More

Category: Apprenticed Investor, Investing, Mathematics, Psychology, Rules

Lessons from Merrill Lynch

While I am not a fan of most big firm fundamental analysts, over the years, Merrill Lynch has had some sharp guys in their Chief Strategist/Economist positions. Here are some lessons and rules from 3 of them. Richard Bernstein was “notoriously cautious on stocks for much of this decade” — and was very bearish on…Read More

Category: Apprenticed Investor, Investing, Markets, Rules

Lessons to Be Learned From Dow 36,000

“This book will convince you of the single most important fact about stocks at the dawn of the twenty-first century: They are cheap….If you are worried about missing the market’s big move upward, you will discover that it is not too late. Stocks are now in the midst of a one-time-only rise to much higher…Read More

Category: Investing, Markets, Really, really bad calls, Rules


Category: Investing, Rules, Trading

25 Rules to Grow Rich By

Category: Investing, Rules

Five phrases that signal a fund manager is covering up

Category: Corporate Management, Investing, Rules

The golden rules of investing

Category: Investing, Rules