I was recently speaking with a professional investor who in the early 2000s had been approached to invest with Bernie Madoff. He refused. When I asked him why, he answered, “It was long assumed that Madoff was doing something illegal, likely front-running (in which a broker places his own trades in front of his clients’). We don’t do business with people like that.” I responded, “A great many successful and high profile people invested with Madoff. Why do you think they did?”
His answer was insightful: “Successful and high-profile people can be greedy just like everyone else. Many of them no-doubt thought that Madoff was a crook like we did, but they also thought he was ‘their’ crook. They let their greed get the better of their judgment. Happens all the time, unfortunately.”
Later that evening, I was watching an episode of “American Greed.” In that episode, a number of elderly people put all of their retirement savings into a dubious investment that turned out to be fraudulent. As we were watching, my wife wondered aloud, “Why would they put everything they had into these investments?” As she asked, one of the people profiled in the episode said something to the effect that, “I should have known better. I just got greedy.”
It is natural to desire wealth. Who doesn’t want nice things? However, many people assume that being wealthy means living a life of leisure and being worry-free. While this might be true for some wealthy people, it is not true for all of them.
For example, I know a number of very successful professional investors. While each of them is different personally, they have many things in common professionally. Foremost amongst these is their work ethic: These investors, and their staffs, work a great deal more than 40 hours per week. Theirs is most definitely not a life of leisure.
Another thing they have in common is an acute sense of risk. Investments can lose money for any number of reasons, and as such they work very hard to identify and monitor all potential causes of loss. In fact, some of these investors equate their long-term investment success to how intensely they worry about, and monitor, their investments.
Based on the above, here are some ways to mitigate the risk of loss due to greed:
* You cannot be defrauded if you do not give your money to a fraudster. Therefore, be extremely careful whom you trust with your money.
* Unethical people cannot be trusted. Period. If you find yourself in a business relationship with a dubious or unethical person, end it.
* If you are not wealthy and yet are presented with a seemingly lucrative investment opportunity, ask why you have been approached, or “targeted,” with the opportunity.
* Unless you have ample time to carefully screen potential investments and to perform intensive due diligence — and by due diligence I do not mean Google searches — consider hiring a professional money management firm to invest for you.
* Absent a very compelling reason, only hire large money management firms. Large firms tend to have large assets of their own and therefore ample amounts of insurance to protect those assets in the event of lawsuits.
* No matter who invests your money, you must carefully and continuously monitor their performance to ensure that things stay on track, and to take timely action if they veer off course.
Everyone has the potential to be greedy, which is why you have to be careful not to let it get the better of your judgment.
Calandro is a managing director of a global consulting firm, Fellow of the Gabelli Center for Global Security Analysis at Fordham University, author of “Applied Value Investing” (McGraw-Hill, 2009), and a contributing editor of Strategy & Leadership, a bimonthly publication for senior managers and organizational leaders. He also is a member of Progress Through Business.
Check out this SEC resource: A Guide For Seniors -Protect Yourself From Investment Fraud Act Now