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Harry Newton's In Search of The Perfect Investment Technology Investor.

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9:00 AM EST, Thursday, December 18, 2008: I'm revisiting and expanding on the lessons we learned yesterday from The Bernie Madoff Ponzi Scheme Fraud. Thank you Dan Good and Todd, amongst many, for help. Here we go:

1. Don't get suckered in by the alleged high returns and dump more money in. If anything, take your money out. Don't put more money in. It destroys your portfolio allocation and leaves you hanging, subject to someone else's whims. Re-balance regularly. There are actually people who gave Bernie Madoff 100% of their portfolio. These people are now broke and being forced to sell their houses.

2. Be wary of Bigger is Better. More money to manage doesn't bring bigger results. In fact, it's much harder to make big returns with big money. Bill Miller and a zillion others before him proved that one.

3. More money and more success bring more hubris. More hubris brings more invincibility. And more invincibility leads to mistakes, which leads to more gambles and ultimately to cheating. There's no evidence to suggest that Madoff didn't do OK at one point. Only when he got too big and things went against him (like he had to return more money than was coming in) did he resort to lying, cheating and stealing.

4. Be wary of people who give large amounts of money to charities. There's usually a reason beyond the inherent goodness of the charity or their heart. For people in finance, charity is a sales expense. Madoff was a huge contributor to many charities, which sadly will now suffer. Every time a finance guy gets given an award at a big banquet dinner for giving oodles of money, think of that as his free advertisement -- cheaper and more effective than ads on CNBC.

5. Due diligence makes sense. But it's not easy, nor is it foolproof. Asking some of the financial institutions who flunked Madoff would have been a major eye-opener. Societe-Generale kept its clients away from Madoff -- though it still lost billions with that rogue trader.

6. Don't trust fund of funds to make your investment decisions. Many put other people's money into Madoff. But they did virtually no checking. These fund of funds spend their money and efforts on marketing, not administration. Fund of funds put another layer of fees and incompetence between you and the ultimate money manager -- the one who touches your money.

7. There are actually very few good money managers. All go wrong eventually. No matter how competent your manager, you don't want all your eggs in one basket.

8. Back test the strategy. If he's playing commodities and says he's had a consistent 10%-12% return for the past 10 years, check out if this is plausible. Apparently Madoff's strategy couldn't work -- because there simply weren't sufficient instruments to trade based on how much money he had to manage. Read the article in the next point.

9. Don't trust the SEC, the state regulators or anyone else to protect you. NY AG Cuomo and his Mass equivalent Bill Galvin did wonders for holders of auction rate securities. But even that was after the fact, not while it was going on. The SEC knew years ago about Bernie Madoff and the likelihood that he was running a Ponzi scheme. But the SEC did nothing. Don't believe me? Read the Wall Street Journal's piece, Madoff Misled SEC in '06, Got off.

10. Don't put more than 5% of your assets in any one investment or any one manager -- even if he has multiple funds and other vehicles you can invest your money.

11. Limit your illiquid investments as a class to 10% of your total investible funds. Harvard owns timber forests. They're the classic illiquid investment. Harvard will never sell them. They couldn't today. But they don't need to. They have enough cash. And they're tax-free. But you're not. You pay taxes. And if you die, you may have to pay lots of them. The IRS prefers its timber products as checks, not trees.

12. Be wary of investing money little known organizations -- especially those where investing was a privilege. Well known companies will screw up and lose your money. But you'll rarely lose 100% of your money through fraud.

13. Verify that a Big Four accounting firm provides annual certified audits. If you're dealing with a hedge fund, it's reasonable to ask for a copy of the latest report from the fund's prime broker.

14. Don't invest in "a magic box," i.e. you don't know what you're investing in. No one knew precisely what Madoff was doing. But because his alleged returns were so good, no one seemed to want to find out. No one wanted to break the money machine.

15. Some monthly return statements are not worth the paper they're written on. Anyone with a $500 laptop and a copy of Excel can make pretty reports. Paper is cheap. Results are expensive.

16. Be wary of the Yield Risk, also called The Risk Reward. I remember when "junk" bonds yielded 15%. You knew by that high yield that they were "junk" and hence ultra-risky. But 10% to 12% never seemed risky. Yet that's exactly what Madoff "delivered." He knew if he had "delivered" a higher return, red flags would have gone up. As the amount of investible money has skyrocketed in recent years -- think China, Japan, successful dot com entrepreneurs etc. -- the rate has come down. Personally, I now think "junk" starts around 7%.

17. Don't sneer at a peaceful life. A friend retired and put all his money into U.S. Treasuries. Another fellow put all his money into muni bonds. Neither "investor" is getting a high rate of return. But their principal is safe. And they can live on the interest for the rest of their lives. I would have been much richer if I had taken all the monies I got from selling my business in 1997 and invested it in treasuries or muni bonds. Instead I chased yield, got taken by crooks (not Madoff) and bought into bum real estate ventures. Fraud or failure in the end aren't that different.

The Madoff fraud will redefine finance. David Rhoden, a Texas reader, writes:

Harry, again I continue to enjoy your column....however.....when you continue to say for investors to do their "Due Diligence"...has become a laughing matter.....with the scandalous society and financial can any one do "Due Diligence"...? can anyone really believe anything they "see, hear or read anymore"...?......their is no such thing anymore as to Due many things these days prove to be false later.....its a sad world.


Going forward, we can't take anything any longer for granted.

When I ran a publishing company, our mantra was CHECK. CHECK. CHECK. Many people didn't check Madoff out.

And finally, don't forget to say NO. It's the hardest word in the English language. But I know you're bright enough to learn it.

Lessons from an Ice Storm. Global warming doesn't mean things are getting warmer. It means the weather is getting nuttier. Last week we had an ice storm at our country house. We were without power for five days. We could have frozen busted pipes and a ruined house -- except our contractor hooked up a portable generator and ran our boiler sufficiently to keep the house warm.

Everyone needs to have a cold weather strategy. One way is to shut off your water and drain your pipes every time you leave. Another is an emergency generator -- one that kicks in when it's needed and one that has sufficient fuel to last a week.

Get your flu shot. There is some bad stuff going around. You don't want it. Wash your hands regularly.

Alvin Ailey American Dance Theater is stunning. You either like dance or you don't. I do. Here are scenes of incredible, wonderful dances I saw last night.

This is Judith Jamison, the company's artistic director and their best dancer ever. I fell love with Ms. Jamsion sometime in the mid-70s.

The season ends January 4. For tickets go to Buy single tickets. You'll sit apart. But you'll both get better seats.

Getting your teeth in the task at hand. Christmas is coming. Here's a recipe you won't find on

Ghoulish New York City "humor":

A man hits a bicyclist.
The mangled bicyclist: What's the matter with you? Are you blind?
Car driver: Blind? Are you crazy? I hit you, didn't I?

Overheard on a New York subway.
Man to woman: "Be reasonable, Phyllis. I made this date with Rita three months before you and I were married."

A tourist asked the cop on the corner. "Do you know the way to the subway?"
He replied, "Lady, I don't think anyone has ever made it that far."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.