The Motley Fool - As we take in the 150-year prison sentence of disgraced financier Bernie Madoff, many questions remain regarding the up-to-$65 billion Ponzi scheme he masterminded. For investors, however, the episode raises one question that supersedes all others: How do I avoid investing my money with a fraudster?
Evaluating a proposition
For example, imagine that a friend of yours tells you that he has money invested with a bright young money manager who is doing very well for him. He suggests you consider putting some money with this fledgling star. Intrigued, you make some inquiries and you're able to glean the following information:
- The money manager is secretive, he works alone, and he handles the administrative paperwork of his investment partnerships himself.
- He's produced market-beating returns consistently, but only reports his performance to his investors once a year.
- Finally, he does nothing to market his investment partnership -- prospective investors have to ask him to take their money.
These look like red flags, and you decide to pass on investing; you're pleased with your instincts: You may have just avoided being a victim of the next Bernie Madoff. Perhaps.
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