Bernie Madoff was a highly sought after money manager for the rich and famous. You had to be “somebody” before you could get an audience with this Ponzi schemer.
Goldman Sachs was/is the crème de la crème of high finance investment firms. If a Goldman salesman called to offer to open an account for you, you knew you had “arrived.”
Both scammed their customers out of billions and have left financial debris in their wake. What are the lessons we can take away?
1. Beware of “reputation” and the negative sell. “Are you good enough or rich enough to invest with me? “ is a trick question. At that point the victim is begging to be fleeced. The biggest flops I have seen in my career have been created by people with great reputations (see Long Term Capital, below).
2. Don’t invest in things you don’t understand. Ask the question I always ask: “How can the wheels come off?”
3. Don’t invest in something that you can’t sell the same day. (There are exceptions but they are far and few between).
4. Amateur investors are accidents looking for a place to happen. If you don’t change your own oil, write your own will, do your own brain surgery; you should not practice do-it-yourself investing. My experience is that the smarter people think they are, the worse their investment decisions will be. Doctors, as a class, are the worst because they know they are the smartest people in the world.
5. Find a professional who has been around a long time. There is no substitute for experience. Experience does not necessarily make you smarter, but it helps you avoid making the same dumb mistakes all over again. The person who put the Goldman deal together, Fabrice Tourre, is 31 years old today. He did this deal in 2007, which made him 27 at the time. Would you invest a billion dollars on the advice of a 27 year-old even if his card said “Goldman Sachs?” If your answer is “yes,” congratulations, you have joined the masters of high finance who lost money to this punk kid.
6. Never invest in schemes that promise outsized returns. Some scammers tell you that they are letting you in on their secrets to riches because they have become wealthy and want to “give back.” That’s right up there with the Nigerian finance minister who would like to deposit his millions into your bank account.
7. Investing is as much art as science. Don’t be misled by sophisticated computer models that use past data to predict the future. Long Term Capital was a hedge fund run by Nobel Prize winners that nearly wrecked the US financial system when it blew up in 1998.
8. Investment success depends on controlling emotions. The herd is usually wrong at the turns. More money flows into stock funds at the peak of the market than at any other time and the largest redemptions are at the bottom when people should be buying.
9. There is no such thing as short term investing; that’s speculation.
10. Never speculate with what you can’t afford to lose.
Goldman Sachs was/is the crème de la crème of high finance investment firms. If a Goldman salesman called to offer to open an account for you, you knew you had “arrived.”
Both scammed their customers out of billions and have left financial debris in their wake. What are the lessons we can take away?
1. Beware of “reputation” and the negative sell. “Are you good enough or rich enough to invest with me? “ is a trick question. At that point the victim is begging to be fleeced. The biggest flops I have seen in my career have been created by people with great reputations (see Long Term Capital, below).
2. Don’t invest in things you don’t understand. Ask the question I always ask: “How can the wheels come off?”
3. Don’t invest in something that you can’t sell the same day. (There are exceptions but they are far and few between).
4. Amateur investors are accidents looking for a place to happen. If you don’t change your own oil, write your own will, do your own brain surgery; you should not practice do-it-yourself investing. My experience is that the smarter people think they are, the worse their investment decisions will be. Doctors, as a class, are the worst because they know they are the smartest people in the world.
5. Find a professional who has been around a long time. There is no substitute for experience. Experience does not necessarily make you smarter, but it helps you avoid making the same dumb mistakes all over again. The person who put the Goldman deal together, Fabrice Tourre, is 31 years old today. He did this deal in 2007, which made him 27 at the time. Would you invest a billion dollars on the advice of a 27 year-old even if his card said “Goldman Sachs?” If your answer is “yes,” congratulations, you have joined the masters of high finance who lost money to this punk kid.
6. Never invest in schemes that promise outsized returns. Some scammers tell you that they are letting you in on their secrets to riches because they have become wealthy and want to “give back.” That’s right up there with the Nigerian finance minister who would like to deposit his millions into your bank account.
7. Investing is as much art as science. Don’t be misled by sophisticated computer models that use past data to predict the future. Long Term Capital was a hedge fund run by Nobel Prize winners that nearly wrecked the US financial system when it blew up in 1998.
8. Investment success depends on controlling emotions. The herd is usually wrong at the turns. More money flows into stock funds at the peak of the market than at any other time and the largest redemptions are at the bottom when people should be buying.
9. There is no such thing as short term investing; that’s speculation.
10. Never speculate with what you can’t afford to lose.
Oh yes, here's a bonus:
11. Don't take legal advice from your doctor, medical advice from your lawyer or financial advice from your CPA. They are specialists at what they do but dunderheads when they venture outside of their specialty.
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