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Greetings!
Welcome to the Winter 2009 edition of my
newsletter.
The main article in this newsletter will be
about what
to do to avoid losing money to scams like the
one Madoff managed to keep going for so many
years.
In the meantime, as we are dealing with the
painful effects of the huge deleveraging
process underway and the deepening world side
recession, let's all focus on what we can
control and work harder and do our best to
hang on. There may be more pain ahead but I
firmly believe that all this painful
restructuring currently going on is going to
provide a much stronger
foundation for a prosperous future, it's just
that it's going to take some time to get
there.
I only send this out about three to four
times a year and your email address will
never ever be given to marketers or anyone
else! If you prefer not to receive my
newsletter you can easily unsubscribe by
clicking on the "SafeUnsubscribe" button at
the bottom
left of this email or simply click reply and
just
type "remove".
If I could be of any help in the future
please do not hesitate to contact me.
Thank you for reading.
Sincerely,
George
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| Madoff and how to avoid scams |
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Near the end of 2008 we learned that Bernard
Madoff, a Wall Street fixture for decades and
former NASDAQ Board Chairman and Governor,
had operated a giant Ponzi scheme that may be
responsible for losses up to $50 billion.
This scam will easily go down in history as
the biggest ever.
Here are some things that can be done to
avoid becoming a scam victim:
1. There should be an independent
Custodian brokerage firm holding your
assets.
Madoff was able to get away with his scheme
for so long because he wore all hats in the
transactions. He was receiving the money, he
was "investing" it and he was making up
account statements "reporting" his amazingly
consistent results. If the regulators ever
see the light (these are the guys who were
repeatedly tipped off about Madoff, even
receiving a report titled "Madoff is operating
the world's largest Ponzi scheme") they would
require that Advisors hold client assets in
independent Custodians with no
exceptions.
2. Never make a check payable to the
Advisor or his firm.
The check should always be made payable to
the independent Custodian brokerage firm
holding your assets. If anyone asks you to
write a check payable to him/her or to
his/her firm it's a sign that the money may not
end up in your account.
3. Understand the investment
strategy.
You should try to understand as much as you
can about the investment strategy your money
will be invested with. If you do not
understand it, you should not invest! This
should not be rocket science; many people in
this business try to make it look like a
sophisticated (or proprietary) and
complicated affair; the more sophisticated,
the higher fees they can justify. Demand
transparency, it is your money! And know how
much all this is costing you, demand
to be provided with a comprehensive list of
fees you will be paying, including any
compensation provided by third parties. One
financial adviser in Los Angeles was charging
4.5% of assets under management and he was
simply giving the money to Madoff to lose it
all! Some companies were investing in several
hedge funds for their own clients and
Fairfield Greenwich Advisors was at the very
top of the very long victim list with over $7
billion evaporated. Its brochure stated "the
company's main goal is to avoid the risk of
fraud"! Another company
sending money to Madoff was charging the
following fees: hurdle fee of 5%, performance
fee of 16% and
annual management fee of 0.8%!
4. If it is too good to be true, it
probably is.
There is no way that any person in the
investment business can make money
consistently in all kinds of markets. Madoff
reported no losing years and only 4-5 losing
months in almost 20 years which is not only
impossible but simply absurd! Some other scams
discovered in 2008 involved: one promising
investors 48% annual returns from funding
commercial loans, another claimed returns as
high as 38%, a phony hedge fund that
supposedly produced annual returns as high as
61%, a currency-trading scheme in Georgia
which promised returns of 10% a month. As I
was writing this the Feds shut down and
charged Stanford Financial Group with a
massive $8 billion fraud; Stanford was
touting CDs that were paying much higher
interest than other CDs for many years.
5. Demand your adviser is a
Fiduciary.
Fiduciaries, by regulation and by law, put
their clients' interests ahead of their own.
All members of our National Association of
Personal Financial Advisors (NAPFA) group are
fiduciaries and we must sign a Fiduciary
Oath. We strongly believe that a fiduciary
standard is the highest legal standard
possible and must be applied to all financial
advisors and we are strictly forbidden to
accept commissions or any type of third party
compensation. Many financial advisors, such
as ones who work at Wall Street based
companies, have a fiduciary obligation to
their employer, not to their clients. For
many years most people in this business have
operated and have been regulated under the
"suitablity" standard which clearly does not
go anywhere near the standards required under
the fiduciary standard. Unfortunately, the
brokerage lobbyists are working overtime to
expel the fiduciary concept from the
regulatory lexicon for ever. Ms. Schapiro,
the incoming SEC Chair, has been one of
the most vocal advocates of the suitability
standard and is likely to work to banish the
word fiduciary from the industry.
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| Gems |
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- Quote
"You make most of your money in a bear
market,you just don't realize it at the
time"
by Shelby Davis
- Quote
"I still think the year will end in the plus
column....So keep buying"
Ken Fisher
in the April 21, 2008 issue of Forbes
- Quote
"The market will not revisit the panicked lows
it hit on July 15...Bye-bye bear market. Say
hello to the bull, and don't let the door hit
you on the way down out"
Jim Kramer,
July 30 2008 on CNBC's Mad Money Show
- Quote
"I might as well have picked a business
specializing in the bubonic plague lately"
Mr. Balter, who specializes in
picking hedge funds for clients (and charges
0.5% to 1.5% of Assets Under Management for
his services)
- Quote
"The function of economic forecasting is to
make astrology look respectable"
John
Kenneth Galbraith
- Quote
"If you invest with anyone who claims never
to lose money, reports amazingly smooth
returns, will not explain his strategy,
refuses to disclose basic information or
discuss potential risks, you 're not
sophisticated, you are an oxymoron"
Jazon Zweig, Intelligent Investor
column, Wall Street Journal, December 13,
2008
- Quote
"There are two kinds of forecasters: those who
don't know and those who don't know they
don't know"
John Kenneth
Galbraith
- Quote
"Now I ask for the dribble cup along with the
Wall Street Journal...I don't know what will
stop it - and that's one of the things that
drives me bonkers about the current market.
I see a value, I buy some shares, and the
sucker goes down. Then it's rinse and repeat
and repeat and repeat. Oh, the horror"
Andrew Feinberg in the December 12,
2008 issue of Kiplinger
- Statistics
Merrill Lynch had a total net loss of $27.08
billion in 2008. Yet, the total compensation
and benefit expenses were $15 billion in
2008, down from $15.9 billion in 2007.
The former CEO spent $1.2 million to furnish
his office in early 2008. Just a few of the
expenses: area rug for the bargain price of
$87,784 and $7,315 for Roman shades!
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| Press Coverage |
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I was quoted in the December 12, 2008 issue
of Investment News in a story titled "Home
equity borrowers may have jeopardized
retirement" by Lisa Shidler.
Here are the specific quotes from the story:
"Any equity from a person's house isn't
counted for retirement calculations", said
adviser George Papadopoulos, a Novi,
Mich.-based sole proprietor.
"I always hold to the philosophy that you buy
homes to live in and not for investment.
People who were going to do this have a mess
in their hands and they probably cannot
retire now"
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