The Investment Scientist

Archive for July 2009

Like to hurt yourself?

Investors don’t need outside help to hurt themselves. I’ve been writing about how ignoring conflict of interest, hidden fees, and not taking the necessary time to do due diligence costs investors a great deal of money. Today, I’m going to show you another way they self-inflict pain, and what to do about it.

Let’s imagine you’re in your car. Your vehicle is traveling at 60 mph. How can you, as a passenger, only be going 30 mph? You can’t. It’s an impossibility. Nevertheless, it happens in the financial world all the time.

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This week, Bernie Madoff was sentenced to 150 years in prison by New York District Judge, Denny Chin. With the trial now over, Madoff’s victims are still fighting over what little is left of his fund. They want to know: Where was the SEC?

More appropriate questions should be: How did Madoff do it? What human frailties did he exploit? How was he able to con $65 billion out of the most sophisticated members of our society?  Here’s how his scam worked:


We humans lower our guard when we believe other people are similar to us. Madoff exploited this one masterfully. Much like Charles Ponzi, who looked for his prey among Italians, Bernie Madoff focused on exclusive Jewish social clubs and Jewish foundations.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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