Earlier today, 71-year-old Ponzi scheme mastermind Bernard Madoff was given the maximum sentence for the 11 criminal counts to which he pleaded guilty: 150 years in jail.
The judge did not mince words: "Here the message must be sent that Mr. Madoff's crimes were extraordinarily evil."
The judge also said that his sentence was symbolic -- to deter any would-be Madoffs from steering down the wrong path. Already, his sentence is substantially more severe than other high-profile fraud cases like WorldCom's Bernie Ebbers (25 years in prison) and Martha Stewart, who served five months in jail on charges stemming from favorably timed sales of ImClone Systems (NASDAQ:IMCL). (Note to future parents: Avoid the name "Bernie.")
Stewart's stock sales saved her about $50,000, according to MSNBC. Madoff stole billions of dollars from investors around the world.
They weren't naive investors, either. According to The Wall Street Journal, victims included asset managers, banks like Spain's Banco Santander (NYSE:STD), and filmmaker Steven Spielberg. Now that the punishment has been meted, though, it's worth asking what we average folks can learn from the Madoff mess.
I put that question to a panel of Motley Fool advisors, analysts, and editors. Here's what they had to say.
Tim Hanson, co-advisor, Global Gains: The first lesson is: Things that are too good to be true probably are. The second and more relevant financial lesson is: Diversification is your friend. One should never have 100% of his or her money tied up in any one thing.
That includes, but is not limited to, one country, one currency, one asset manager, one asset class, one stock, one bank, etc. Immorality, after all, exists everywhere, from famously big companies like Tyco (NYSE:TYC) and Enron on down to tiny Chinese names like Fuwei Films, whose principal shareholders were found guilty in China of misusing state assets. So, seriously, diversify.
Robert Brokamp, advisor, Rule Your Retirement: There are a lot of risks out there -- inflation risk, interest-rate risk, market risk, currency risk, and Risk (the game of world conquest, by Hasbro).
In light of the Madoff scandal, we will add another to the list: manager risk, the risk that the person handling your money won't do such a good job of it. This isn't just the possibility that your manager is a malefactor; there's also the chance that your manager has lost his touch, or was not much good to begin with. The classic example these days is Legg Mason's (NYSE:LM) Bill Miller, whose Legg Mason Value Trust mutual fund beat the S&P 500 for 15 years straight before lagging an average 10% annually over the past three years.
Like many risks, the way to mitigate manager risk is diversification. Having more than 10% of your investable assets with one manager is probably too much.
Joe Magyer, senior analyst: First, let me just say that there's hardly any punishment that would be too cruel or unusual for Bernie Madoff. Personally, I'd like to see him forced daily to read tales of the ruin he has caused, maybe while being repeatedly kicked by a cadre of unusually cruel oompa-loompas.
That out of the way, investors have two big takeaways from this tragedy. First up: Risk, like the Force, surrounds us. All investments have risk -- especially the ones that look too good to be true.
And that leads to the second takeaway: Diversify. Bernie Madoff managed to fool plenty of pros over the years, pretty well demonstrating that even the savviest among us make mistakes. Running a concentrated portfolio worked for Berkshire Hathaway's (NYSE:BRK-A) Warren Buffett, but it has also busted countless investors over time. Diversification is the hands-down best tool you've got with which to protect your savings. So, please, use it!
Anand Chokkavelu, Motley Fool editor: Mark Twain wrote: "Put all your eggs in one basket -- and watch that basket!" Twain is one of my favorite writers, but he was also a notoriously bad investor.
Learn from the heartbreaking stories of the Madoff victims -- no matter how much due diligence you do or how much you think you've vetted management (Madoff ran the Nasdaq Stock Market (NASDAQ:NDAQ), for Pete's sake), make like the Easter Bunny and hide those eggs in many places. A quick real-world example: If you have a hefty portion of your 401(k) in your company's stock, you're betting both your job and your retirement on your company. See Enron for how that can turn out. Or ask employees who scored roughly a 25% (of their highs two years ago) on the General Electric (NYSE:GE) Kool-Aid Acid Test.
John Reeves, manager, Motley Fool: It's tempting to say that the investing landscape has changed forever as a result of the Madoff crime. Even the sentence -- 150 years for the 71-year-old former head of Nasdaq Stock Market -- declares that we mean business when it comes to fraud nowadays. No doubt there will be a flurry of activity in the coming weeks at the SEC and FINRA [Financial Industry Regulatory Authority] to make sure this doesn't happen again in the future.
These efforts will be mostly for show, however -- just like the sentence. The SEC is woefully understaffed when it comes to providing adequate oversight, so that's unlikely to change much. And human nature is surprisingly impervious to learning from events like this. One industry professional, quoted in The Financial Times, said recently, that "trust has gone out the window" as a result of this crisis. It's amazing that trust was even in the building after some of the recent financial scandals.
My one takeaway from all of this is that we are on our own when it comes to making sound investing decisions, and we should be very skeptical of those who say they are looking out for us, whether it's the government or a smooth-talking financial advisor. This has always been the case, of course, but like all the good lessons in life, we need to be reminded of it now and again.
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