Bernard Madoff (1938 - 2021)
The following article was originally published on March 12, 2009 and republished today, April 14, 2021, on the date of Bernard Madoff’s death.
Today Bernard Madoff plead guilty and was sent immediately to prison. He leaves many devastated people in his wake. Among his remarks to the court he made the following at the heart of his presentation:
"To the best of my recollection, my fraud began in the early 1990s. At that time, the country was in a recession and this posed a problem for investments in the securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients' expectations, at any cost. I therefore claimed that I employed an investment strategy I had developed, called a "split strike conversion strategy," to falsely give the appearance to clients that I had achieved the results I believed they expected."
I...understood that those clients, like all professional investors, expected to see their investments out-perform the market. Perhaps never has such a seemingly innocuous understanding contained such profound seeds of capital destruction. Mr. Madoff is not only guilty, but wrong. Maybe many professional investors expect to see their investments out-perform the market. But not all do. This one does not. And as so often happens, attempts to out-perform the market at any cost may well result in underperformance of the market, and at worst, as we now see, total loss of capital.
As investors, our role in the capital markets is to loan our savings for worthy projects, whether they are federal, state, municipal, corporate, or foreign projects (and we together decide which of these is appropriate and worthy for you, and in what amounts). Our expectations, in the aggregate, should be to earn a rate of return that is fair, defined as the going cost of capital for similar projects. We will never know if Bernard Madoff might have behaved differently had he not felt compelled at any cost to satisfy [his] clients' expectations that he out-perform the market, and it seems doubtful that he would have given the magnitude and duration of his crimes. But it might have offered at least a glimmer of hope as Madoff stood at the crossroads in the early 1990's.
You may think that this commentary applies only to the world of professional investors seeking out over-promising hedge fund managers. But it does not. Every day millions of Americans have conversations with their advisors in which the latter give implicit encouragement and hope that their recommendations will somehow result in returns superior to the merely fair ones being offered by capital markets. And many if not most clients fall for this tale, which at its heart is really only an attempt to retain the client's capital by promising the virtually impossible. And on that dubious basis, the life savings of millions of Americans are invested.
Many people are now waking up to the fact that just about the best we can do is talk about our goals, needs, dreams, and fears, allocate our capital as best as we can given those exigencies, invest with straightforward and honest people, and keep our costs low. Hopefully, the main bait that the Bernie Madoff's of the world use to lure their victims - that they will out-perform the market at any cost - will someday soon be a thing of the past.
Thank you for your continued trust and confidence.
Leonard Golub, CFA
Fiduciary Financial Advisor