Bernard Madoff

Buy What, Bernie?

Bernard Madoff

The name Bernie Madoff has become the icon for everything that is wrong with the financial services industry. Although many scammers have preceded Bernie in deceiving investors and bilking them out of their life savings (and I am sure there will be more), he will always be remembered as "that guy," probably because he is currently serving the longest prison sentence ever handed down to a person for committing financial fraud (150 years). 

In a recent interview with MarketWatch1, Bernie gave a rare inside look into the world of hedge funds and explained why an industry that is constantly breaking the law is consistently getting away with it. From an understaffed SEC to an intricate and vast network of exchanging insider information, many hedge funds are playing by their own rules, often making it near impossible for the little guys to compete.

Although Bernie is no longer managing anyone's money, he still offers his advice for investors from his small cell in Durham, North Carolina.

MarketWatch: "Where is the safest place to invest money these days, with the least amount of risk for fraud?"

Bernie Madoff: "The best chance for the average investor is to put money in an index fund. There are lower commission rates and more professional management with these types of firms. It is the safest and least likely place to get scammed."

Don't be fooled by the phrase "average investor." This phrase is often thrown around by many industry experts, pundits, and even high priced hedge fund managers. Unfortunately, it is often misunderstood. Our belief is that the term "average investor" should be understood as encompassing the vast majority, including institutions and high net worth individuals, and maybe excluding the tiny sliver of market makers that have the resources to invest directly in a business (Warren Buffet) without incurring ridiculous management fees. For most individuals, high net worth individuals, institutions, endowments, etc., investing in index funds is the best strategy to follow.

Bernie's depiction of the money management industry and the efficiency of the capital markets jointly describe the optimal investment solution through two different lenses: one theoretical and one practical. Why do many money managers cheat? The capital markets are too efficient in digesting new information that trying to beat them consistently is a fool's game. Or in Bernie's experience, investors want to minimize the possibility of fraudulent behavior (Ponzi Scheme, money laundering, etc.). Whichever lens investors choose to identify with, they both lead to the same conclusion - Invest in Index Funds!

Like a rose among the weeds, even the most deceptive and egregious financial fraudster can still offer good investment advice.

1 Patel, Sital S. "Madoff: Don't let Wall Street scam you, like I did." MarketWatch:, June 5, 2013.