Lessons from Bernie

01/13/2009 05:12 am ET | Updated May 25, 2011

Do I have a deal for you.

I will manage your money.

I don't take just anyone. In fact, I turn away a lot of business.

I make money for my clients in good markets and in bad.

The risk is low. The returns are high.

Just one thing: if you invest with me, I will tell you nothing about how I do it. It's very complicated and you wouldn't understand it anyway.

Your money won't be held at an independent custodian, like Charles Schwab or Fidelity, where you can access account information 24/7. I will be the source for all your information.

My credentials are stellar. My offices are magnificent.

Are you in?

Over $50 billion in assets, from the most sophisticated investors in the world, said "yes" to this pitch from the newly disgraced Bernie Madoff. Among the biggest dupes were "fund of funds"-- hedge funds, whose sole claim to fame is their much touted ability to select and monitor the performance of hedge funds managers.

There is precious little we can do but express sympathy for the hapless souls who entrusted their life savings to Mr. Madoff. They have lost everything. While we can all relate to their plight, only they understand the pain of his betrayal.

What lessons can we learn from this debacle?

1. No one has the magic bullet. Investors who believe they can get the returns of the stock market with the risk of Treasury Bills are on a fool's errand.

2. Expensive and elitist are negatives in the investing world. Basic and low-cost relate positively to superior returns.

3. Convoluted and complex does not mean superior and profitable. Numerous studies have shown that few retirement plans beat the performance of a simple index of 60 percent stocks and 40 percent bonds.

There is a more fundamental issue which is worthy of serious consideration:

Why do so many highly intelligent, very sophisticated people feel so powerless when it comes to investing? They could easily invest themselves, directly with reputable fund families like Vanguard, Fidelity, T. Rowe Price and Charles Schwab, in a globally diversified portfolio of low cost index funds.

Or they could retain a "fee only" advisor who could assist them with their asset allocation and put together a portfolio of index funds, passively managed funds or Exchange Traded Funds, and add more value by guiding them through difficult times by focusing on long term data.

Instead, they get sucker punched by commission based brokers or advisors who peddle expensive, actively managed funds that under perform the indexes over the long term. Or by the variants of Bernie Madoff, who have all of the accoutrements of financial expertise but the cunning of a sociopath.

Perhaps this is the most meaningful lesson we can learn from Bernie:

The difference between criminal conduct and business as usual in the securities industry is a fine line. Bernie clearly did not have the expertise he claimed. At some point, he stopped trying.

Brokers, advisors and hedge fund managers who claim to be able to "beat the markets" are doing nothing illegal, but their expertise is no greater than Bernie's.

Both are engaged in variants of the same scam.

Investors are the losers.

They just lost bigger with Bernie.

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