Sunday, November 15, 2009

Book Review - The Believers

The Believers is a short (255 page) high level summary of the life of Bernard Madoff. A great deal has been written about Madoff in one form or another (this was one of three books on Madoff competing for space in the local book shop). However, my other readings on the subject have failed to provide answers to two fundamental questions which are of considerable interest to me as an investor:

1. why did the SFC fail to stop Madoff in spite of being repeatedly alerted to the likelihood that he was acting dishonestly?

2. why did so many people entrust so much money to one unlicensed investment fund run by an unlicensed adviser?

Adam LeBor's book focus's on the second question. The answer would make an interesting study in investor psychology or behavioural economics. In a nut shell people invested in Madoff because he created an aura of exclusivity. Being a Madoff investor was tantamount to being part of "our crowd", part of something special and unique. There was also a significant element of people trusting Madoff with their money because other people they knew and respected had also done so.

The obvious lesson for a small investor like myself is to avoid products which attempt to sell themselves on the basis of glamour, exclusivity etc. In effect, make sure I do not follow the crowd.

The other lessons from Madoff are not new. Stick with things which are easy to understand and transparent. Diversify. Know who has your money. Do your own research and do not invest until you have all the answers you need.

The first question receives much the same brief treatment as other writings: no satisfactory reason for the SEC's failure to shut Madoff down years earlier has been given.

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