Following a few age old rules about investing would have prevented the total destruction of fortunes caused by the Madoff ponzi scheme. Here is what would and would not have worked.


The Madoff scandal has shocked and surprised everyone. Charities have lost their endowments and closed their doors. Pensions have been wiped out. Over time, some of the lost dollars may be recovered by SIPC payouts, negligence law suits against third parties and perhaps even some assets hidden by Madoff will be recovered.

Could it happen again? Not if you know what to look out for and not if you follow some age old wisdom totally ignored by the people who were wiped out.

Here are some of the things you should always do that would not have prevented the catastrophe:

1. Make sure you are investing with a licensed company. Madoff was licensed.

2. Make sure you are investing with an insured company. Madoff was insured, to a point, and some of the investors will recover some of their money through insurance.

3. Get references. Madoff had many references from highly acclaimed people.
Warren Buffet has said many times that he will not invest in a security, company or industry he does not understand. Madoff’s strategy was not understood by anyone. If you took the time to understand Madoff’s strategy you would be cautioned not to make the investment.

How many times have you heard the cliché, “If it sounds too good to be true, it probably is.”? If you took the time to review the performance of Madoff’s portfolio year after year you would see that it was too good to be true and you would be cautioned not to make the investment.

How many times have you heard the cliché, “Don’t put all your eggs in one basket.”? Madoff made no secret that his returns were made possible by engaging in an options strategy. Diversification was not part of the offering. Nobody should put all of their money into the same investment even if past returns have been good unless it is a treasury investment.

How many times have you heard the cliché, “The greater the risk, the greater the reward.”? Well it works both ways. When you see a reward (investment return) that is substantially higher than the returns available from almost any other source you should assume that it was achieved by taking substantially higher risk.

If you have a significant amount of money to invest you should only do business with a company that uses a national accounting firm that provides audited, annual financial statements. Madoff’s accounting firm consisted of three local people who will most likely be found to be culpable.