Advice from Convicted Fraudsters, Including Madoff
Marketwatch interviewed some convicted fraudsters, including the infamous Bernie Madoff. The message was clear: retail investors have no business trying to compete with pros on Wall Street. Forget trading for profit, unless you have professional skills and sophisticated software.
No surprise, but insider trading is rampant and can't be stopped or effectively controlled. Another non-surprise: high-speed trading computer programs make lost of money and also can't effectively be controlled. (Why this sort of trading is permitted is another story.) I hope you already knew this, but if you didn't, there it is.
But they're not saying run away from the markets - I think. These convicts generously (?) doled out some advice for the rest of us if we're interested in investing our money in securities. So what do they recommend? Index funds. Why? Here's where it gets interesting.
And in case you're thinking that, OK, in Madoff's case he used some little schlep accountant who did his bidding, remember that the once great accounting/auditing firm Arthur Anderson went out of business because of the statements issued by them regarding Enron - Enron being another criminal enterprise masquerading as a legitimate business.
So you can't trust statements, even when they're "audited"! That's whey Madoff suggests Index funds. These funds simply mirror whatever index they represent, whereas other funds - and let's especially note here hedge funds - contain various securities and other financial instruments, which securities and financial instruments are verified by audit. So if the audit is falsified, you have no idea what they're holding, and therefore you have no idea what the value of your account really is.
So why are Index Funds safe? My guess is that Madoff thinks - or at least is saying - that the entire Wall Street enterprise isn't totally criminal, and that it would be outrageous for an Index Fund to somehow be messed with by its owners.
Part of me says this makes sense. So DIA - the so-called "Diamonds" that represents the Dow 30 stocks - simply holds those stocks in the same proportion as the actual Dow 30 Index. Indeed, I invest in this ETF.
But another part of me does wonder. It's not so much that I'm worried about the fund, but I'm wondering about the statements issued by my clearing firm. Are they reliable? They're telling me what's in my account at a moment in time. But are those securities loaned out to someone; are they hypothecated, or re-hypothecated? If they are, and something goes awry with the counter-party who's borrowing the securities, what then? How do I get my money if I need it?
Anyway, this auditing issue triggered all sorts of questions that I don't have ready answers for. It's a bit daunting just thinking about them, but it's time to do so. To ignore them is folly.
Read the whole article by clicking HERE.
No surprise, but insider trading is rampant and can't be stopped or effectively controlled. Another non-surprise: high-speed trading computer programs make lost of money and also can't effectively be controlled. (Why this sort of trading is permitted is another story.) I hope you already knew this, but if you didn't, there it is.
But they're not saying run away from the markets - I think. These convicts generously (?) doled out some advice for the rest of us if we're interested in investing our money in securities. So what do they recommend? Index funds. Why? Here's where it gets interesting.
...retail investors should be careful when relying on audited financial statements because accounting fraud continues unabated, according to one interview. Accounting-fraud cases are complex, and regulators don’t have the resources to enforce the law effectively, according to one felon.This is critical. Remember that Madoff managed his Ponzi scheme for decades basically by providing completely falsified statements to his clients - statements that told them what they had. And the statements were audited. (Remember, his accountant was prosecuted.)
And in case you're thinking that, OK, in Madoff's case he used some little schlep accountant who did his bidding, remember that the once great accounting/auditing firm Arthur Anderson went out of business because of the statements issued by them regarding Enron - Enron being another criminal enterprise masquerading as a legitimate business.
So you can't trust statements, even when they're "audited"! That's whey Madoff suggests Index funds. These funds simply mirror whatever index they represent, whereas other funds - and let's especially note here hedge funds - contain various securities and other financial instruments, which securities and financial instruments are verified by audit. So if the audit is falsified, you have no idea what they're holding, and therefore you have no idea what the value of your account really is.
So why are Index Funds safe? My guess is that Madoff thinks - or at least is saying - that the entire Wall Street enterprise isn't totally criminal, and that it would be outrageous for an Index Fund to somehow be messed with by its owners.
Part of me says this makes sense. So DIA - the so-called "Diamonds" that represents the Dow 30 stocks - simply holds those stocks in the same proportion as the actual Dow 30 Index. Indeed, I invest in this ETF.
But another part of me does wonder. It's not so much that I'm worried about the fund, but I'm wondering about the statements issued by my clearing firm. Are they reliable? They're telling me what's in my account at a moment in time. But are those securities loaned out to someone; are they hypothecated, or re-hypothecated? If they are, and something goes awry with the counter-party who's borrowing the securities, what then? How do I get my money if I need it?
Anyway, this auditing issue triggered all sorts of questions that I don't have ready answers for. It's a bit daunting just thinking about them, but it's time to do so. To ignore them is folly.
Read the whole article by clicking HERE.
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