Pondering Pnzi

In light of the Madoff scandal, many people want to know, “Could it happen to me?” While no two scams are exactly alike, here are some questions to ask:
1. Does the strategy make sense? It’s been said that if you can’t describe an investment plan on a napkin in crayon, it’s probably too complex. Many investors walked away from Madoff because his approach wasn’t tenable on a large scale as he claimed.
2. Does the investment firm revolve around one central personality? “Success has many fathers,” goes the old saying. A reputable firm will separate investments, accounting, and operations. Even small shops will hire outsiders to handle their custody or bookkeeping duties. Madoff did most everything himself.
3. Are the returns realistic? When shysters offer to double your money in six months, most of us know to steer clear. But Madoff’s deception was more subtle: the consistency of his returns was the warning light. When returns appear overly smooth it’s not a sign of reduced risk, but of hidden risk.
If you think one or more of these factors applies, check it out. Because if ignorance is bliss, bliss can be very expensive.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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