What Bernie Madoff taught every investor

You didn't need to lose money because of the convicted felon's schemes in order to learn valuable lessons.

wall st sign with a building in the background

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Bernie Madoff has died at the age of 82. Convicted of fraud against a massive group of investors in a Ponzi scheme involving tens of billions of dollars, Madoff remained in prison until his death.

Madoff's story involves a professional investor who had had a successful career before taking things one step too far. Unable to live up to the commitments he had made to the many investors who turned to him for help, Madoff successfully covered up his activities for years. It was only when the financial crisis brought things to a head that the full extent of Madoff's fraud became evident, leading to his arrest, trial, conviction, and 150-year sentence.

As painful as the Madoff episode was for the many investors snared by his scheme, it holds some valuable lessons that every investor can learn from. Perhaps the most important is that even after Madoff's death, the risk of securities fraud remains alive and well.

1. It's easy to follow the bandwagon over the cliff

One reason why Madoff was able to sustain his Ponzi scheme as long as he did was that it was easy for new investors to think that they were getting in on a great investment. Early on, Madoff attracted high-profile investors, including prominent charitable institutions. He didn't advertise his business, instead relying on word of mouth from existing clients to bring in new money. By cultivating an air of exclusivity and success, Madoff could largely just sit back and wait for customers to come to him.

Investors need to do their own due diligence to decide if an investment is suitable for them. Relying on friends or business associates for help is common, but it's only the start. If the only reason you invested in something is because somebody else made the same investment, you won't know what to do when things go wrong -- and you risk jeopardizing your relationships as well as losing money.

2. Know what you're investing in

Most investors in Madoff's investment scheme had little or no idea how his purported investment strategy was supposed to work. Few cared. As long as the returns seemed to be coming in -- at least on paper -- many investors were satisfied at what they saw as a job well done. It therefore came as a total shock when they found out exactly what Madoff was doing with their money and why it went wrong.

There are still many investments that are crafted with complex provisions that aren't easy to understand. Even with simple stocks, the businesses that companies are engaged in can be almost impossible for someone outside the field to grasp. You don't necessarily have to become an expert in every industry in which you invest, but you do need to know how you'll make money and what risks there are. Only then can you accurately assess whether you're making a smart calculated risk with that investment.

3. Diversify

When you have a great investment idea, it's tempting to put all your money into it. That's exactly what many of Madoff's clients did, feeling that they'd never be able to match the performance that his investments were generating. That proved to be catastrophic in many instances, as institutions found themselves with huge losses that endangered their entire operations.

No matter whether you're talking about a fraudulent scheme like Madoff's or a completely legitimate yet misguided investment strategy like the doomed Long Term Capital Management experiment, no investment is free of risk. Unless losing everything is an option you're willing to accept, it's always worth it to find a second-best, third-best, and even tenth-best investment idea to go along with your top investment. That way, if things go catastrophically wrong, your losses won't be quite as severe.

A road paved with good intentions

Madoff's death will feel like justice for what many have seen as evil deeds motivated by greed. Yet as Diana Henriques, author of The Wizard of Lies: Bernie Madoff and the Death of Trust, told the Fool's Mac Greer in 2017, neither Madoff nor his clients were as greedy as some believed. In the video clip below, Henriques argues that clients wanted security for their money, while Madoff wanted the adulation and fame of helping prominent charities and other institutions.

Unfortunately, even after Madoff's death, there are still plenty of people out there seeking to take advantage of investors, both through fraud and by more legitimate means. No one can protect your money as effectively as you can, and the Madoff scheme is a good reminder that you have to be constantly vigilant to avoid investments that end up being too good to be true.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 9 January 2025

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

Confused African-American girls in casual clothing standing outdoors and comparing information on smartphones.
International Stock News

Better artificial intelligence (AI) stock for 2025: Nvidia vs. Microsoft

Nvidia has significantly outperformed Microsoft stock over the past couple of years.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
International Stock News

3 subtle investing mistakes I won't repeat in 2025 and beyond

You can avoid the mistakes I made...

Read more »

A bemused woman tries to choose between two slices of cake she holds on two plates.
International Stock News

What's the better long-term investment: The Nasdaq-100 or the top S&P 500 growth stocks?

Investing in top growth stocks can be a great way for investors to grow their portfolios in the long run.

Read more »

man looking happy and excited as he looks at his mobile phone
International Stock News

Jensen Huang just delivered incredible news for Nvidia stock investors

At the CES 2025 technology conference, CEO Jensen Huang highlighted a new multitrillion-dollar opportunity.

Read more »

Happy young couple doing road trip in tropical city.
International Stock News

Why electric vehicle stocks like Tesla just rallied

Wondering what caused Tesla and these other EV shares to pop?

Read more »

a woman with her hands over her face splits her fingers over one eye so she can peep through them.
International Stock News

Will Nvidia stock fall below $100 in 2025?

A worrisome precedent has been set by market leaders of game-changing technologies and innovations.

Read more »

An elephant standing on a chair looking down at a mouse
International Stock News

Should you buy shares in the largest company in the world?

Today, about half of the 20 biggest companies by market value are in the technology industry.

Read more »

a couple clink champagne glasses on board a private aircraft with gourmet food plates set in front of them. They are wearing designer clothes and looking wealthy.
International Stock News

Tesla stock vs Amazon: Billionaires are buying one and selling the other

Several Wall Street billionaires have been making some moves!

Read more »