Madoff scandal a good lesson for young investors - Something "Too good to be True" probably is

Madoff scandal a good lesson for young investors

By Steve Rosen
The Kansas City Star
last updated: January 13, 2009 04:57:51 AM

Don't trust someone with your money just because they happen to wear a nice suit.
I think of that homespun advice -- from an early mentor years ago -- every time I read about the latest horrific investment fraud or scandal that fleeced people out of their money.
In light of the stunning collapse of Bernard Madoff's financial empire, which was nothing more than a $50 billion Ponzi scheme, this seems like an excellent time to share this and other investment words of wisdom with young investors who are just beginning to dip their toes in the stock market's treacherous waters.
The lessons also are relevant to students who will be playing stock market games in school in the months ahead.
Better to learn at an early age that there are a lot of sharks and charlatans masquerading as "advisers" rather than lose a fortune later in life to some phony daddy whiz bang.
Everything and everyone must be challenged -- even friends -- when it comes to choosing someone who'll put your money to work.
In my 30 years as a financial journalist, I've always preached that novice and experienced investors should mix skepticism with judicious questioning before purchasing any product, especially anything promising rocket-like returns.
"Retirement is the furthest thing from most young people's minds," said Don Blandin, president and CEO of the nonprofit Investor Protection Trust. "But if they don't learn about scams and how to avoid unscrupulous con artists, it may remain the furthest thing later in life." Here are a few other lessons from the Madoff mess that would benefit any young investor:
Don't count on quick gains. I'm a fan of patient, long-term investing.
Don't put your eggs in one basket. Resist the urge to put too much money into one investment. Spread it around.
Don't invest if you don't have the stomach for risk. My mantra to investors of all ages: If an investment causes you to lose sleep, it's not for you. There are plenty of other choices that can help you make money and weather the storm of financial risk.
Don't buy what you don't understand. Know how the investments work. I speak from personal experience, having invested at an early age in an interest-rate-sensitive product that was too complicated for me at the time.
Don't wear blinders over your eyes. As bad as the Madoff scam seems, it's going to get even messier. The lawsuits are starting to roll in, and many interested parties are now playing the blame game.
It's the American way.
The problem, as I see it, is that many seemingly smart, experienced investors rarely take a good hard look in the mirror. After all, who really likes to admit that they too, may have messed up by being too trusting or too greedy? The lesson here is that investors with skin in the game must take some personal responsibility for their actions. Do some homework.
Read the fine print in the investment disclosure statements, use common sense and trust your instincts.
I don't want to minimize the severity of what happened with Madoff's wealthy clientele of investors, nonprofit organizations and investment firms. Some charities have been forced to scramble to find fresh money, others have closed, and there's been at least one confirmed suicide.
But the severity of the fraud could have been limited had investors and regulators alike asked Madoff tough questions and been more suspicious about his ability to generate sizeable profits in down markets.
Which leads me to my final message: When something seems too good to be true, it usually is. Timeless advice indeed.
As bad as this scam seems, another even worse one is sure to roll down the pike -- and, without proper inspiration and information, it may be our children who become future victims.
E-mail Steve Rosen at srosen@kcstar.com.
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