The One-Basket Rule

Bernie Madoff will die in jail sometime during the 150-year sentence he received today. In reading the court transcript of his sentencing hearing (pdf), I was struck by the enormity of his fraud, and by his continued self-serving posture.

In particular, the judge made note of the fact that, while defense counsel had argued that Madoff should receive some leniency because he turned himself in and confessed to the FBI, Madoff had in fact done these things because he couldn't keep up with the requests from his investors who asked for their money. Basically, he would have been caught eventually and he knew it, so turning himself in might mean he'd get better treatment. Perhaps, if he hadn't done such an extraordinary job of stealing from his victims.

The other thing that struck me was in the statements made by the victims. Many of them were retirees who had lost their life savings. Every time I read that, I remembered how many other times I'd read or heard about swindlers who'd cheated people out of all they had in the world.

But why isn't anyone asking the really tough question: what were you thinking when you decided to invest everything you had with one investment house? It's the One-Basket Rule: as in Don't Put All Your Eggs in One Basket. Lisa and I used to have a pretty decent pot, which is now slowly growing again after taking a massive haircut in 2008. I have one guy managing it, but we have multiple accounts, with multiple investment houses, precisely to avoid such a thing from happening. Not only that, we have money that just sits in insured accounts.

In my line of work, I've met many, many wealthy people. One in particular has income that rivals Madoff's. Most, if not all of them, spread their wealth around -- some cash, some real estate, some private companies, some public companies -- between several different money managers. It's the only way. Madoff's victims share some collective responsibility for being short-sighted and getting seduced by Madoff's promises of high returns.

Now, Madoff was a genius, well-connected, and well-regarded in his industry, so there weren't too many people who would have advised against investing with him. But that's not the point. No matter what so-called investment experts say, common sense alone mandates that one diversify and be vigilant.

No one is going to get their money back. Many victims are ruined and face a future of untold stress. I feel horrible for them. Let their hardships be lessons for us all.