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Madoff's Far-Reaching Fallout


Legitimate advisors confront skepticism, mistrust.


A few weeks ago, I had never heard of Bernard Madoff. When news broke of his Ponzi scheme, I may have spent 5 minutes, at most, pondering those affected by his actions. I'm not insensitive - but it simply didn't concern me, and life goes on. That is, until recently: Madoff's actions have started to affect me directly in ways I never could have imagined.

Allow me to explain.

I'm a simple man - a father and a husband. My family, which has been tied to the stock market for over 100 years, gave me a passion for the markets. My regulatory title is investment advisor, and I have been managing money in one capacity or another since 2000. I don't sell commission products, fancy incomes partnerships, or exotic investment strategies. I simply trade equities, and I'm always looking to make money regardless of the environment.

I custody assets with Charles Schwab, which means my clients can see their accounts 24/7, and money is never in my possession. My 2 limited powers are to manage the client's funds and withdraw my paltry 1% per year fee, billed quarterly. While my early education was in fundamentals, I've spent the last 5 years studying technical analysis, so it wasn't rocket science to me when the markets broke a multi-year downtrend. I knew it was time to step aside.

As 2008 evolved, and markets declined, did I kill it on the short side, reaping incredible benefits for my clients via inverse ETFs such as ProShares Inverse QQQQ (QID) or Ultrashort Financials (SKF)? Nope, I sat idle for a majority of the year with my sole intent on keeping the gains I had made for clients the many years prior. In hindsight, no capitalizing on the initial trend break was one of my biggest all time misses, but I take refuge in the fact that at least I respected the break and stepped aside.

When all was said and done, my client accounts fared well in 2008, with my benchmark client account dropping 1.57%, or slightly more than my 1% management fee for the year. Did I knock the cover off the ball? Of course not, but in the world of passive investment advising, it was good enough to establish my firm as a real player.

Now, I'm sure many individual traders crushed this number. Heck, I work with over 100 a day in Tickerville who I'm sure easily beat this return. But when you manage separate accounts, it's a different ball game - and the point of this piece is not at all to engage others in a discussion about performance.
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