Madoff, American Piranha

I am an ex-convict, as of January 15, 2002. The prefix is permanent, but the root word is not. I was fortunate enough to get the message during my first week in prison. Although I was sentenced to six years’ confinement in a correctional facility, there was no way I could have survived the stark change in my environment. I appealed to the superior court to be re-sentenced to a shorter term was successful. I served a total of seven months on a farm in South Jersey and will never return to the prison system.

My mind is totally changed. The corruption that evolved in my thinking has been replaced with a permanent commitment to be a benefactor to society for the rest of my life.

I wish I could say the same for Bernard Madoff, but I cannot. He is a much different kind of animal.

A reporter called me about a week ago. After he introduced himself as a member of a global news organization, he said he was working on a story about Bernie Madoff and would like to know what I thought of the man. My immediate reaction was to recoil with a complaint I had been harboring about the local newspaper that included my name in a caustic report, sparking the reporter’s interest. After making it clear to the caller that Madoff and I had nothing in common, except for gender, was given an opportunity to describe the quality of advising I performed for nearly twelve years, prior to succumbing to a gambling addiction.

My overall answer to the reporter’s initial inquiry was probably too brief, in retrospect. I said Madoff is an evil person with little or no self-respect. Today, I could easily expand my assessment. This man began an adventure that was based on a desire to steal from the rich. His commitment was so strong, it allowed him to become extremely successful in his pursuit. So much for Bernie Madoff.

The Other Half of the Equation.

Some investors (and corporate managers) are the greediest people on earth, a point that I make in my book, Stock Power. In order to run a successful ponzi scheme, you need to have a sizeable market of gullible participants, just like you need both buyers and sellers in the stock market.

It’s most unfortunate that some of Madoff’s victims were captive investors along for the ride; but a decision maker who is persuaded to make an egregious pledge without verification of the validity of the return on investment is a fool. Regardless of the impression a solicitor makes with references and facades of extreme success, the age-old principal still stands. A sucker is born every day (P.T. Barnum). Apparently, wealth isn’t necessarily the modifier.

Since the late eighties, major markets have crumbled when investors pursued false promises of extraordinary gains. In the 1987, it was the junk bond market. Some twenty years later it was the housing markets. Meanwhile, con artists, large and small, have preyed upon hapless and hopeful zealots who might still believe in the Fairy Godmother.

True Story

In 1995, I discovered a timber producing company called Rayonier Timberlands, LP (NYSE: RYN), operating in several countries including the U.S. At the time of my discovery the stock was paying a dividend of approximately 1% per year along with a monthly payout of approximately 30% (annualized) that represented return of principal. My research revealed that the company would continue to make similar payouts until January 2000. The key caveat was to beware of any early downturn in the company’s revenue streams. The value of the stock increased by 11% from January thru December of 1995, and I think I know why.

Every one of my clients to whom I introduced this investment was told about the risk of the investment. Therefore, they understood why they were getting an annual rate of over 30% while conventional dividend stocks paid 8. A handful of investors did not question why the stock was paying an incredible annual income but still wanted to participate. I told them how the investment worked, regardless, and they thanked me. That’s how my reputation continued to rise in the mid-nineties.

Even in today’s environment, there are several investment vehicles that will provide an annual return of 10% or better. Well advised investors know about these opportunities and will prosper if they allocate the right fraction of their total holdings. Why anyone would abandon the age-old principles of asset allocation is a mystery to me, except to say that money can skew the senses.

So, we wait and watch, in unprecedented disbelief, while this sordid sage about a horrible caper plays out. I hope Bernard Madoff is served the maximum penalty for his crime and that his soul is redeemed.

Hudster