Madoff vs. Your Mutual Fund: Madoff Wins

Cuban, as always, gets it right when it comes to “buy and hold” invesment strategies. This time, he suggest that investing in a mutual fund that tracks Dow or Nasdaq was a big mistake,  even in comparison to investing with Madoff.

Here is the quate from Cuban’s blog:

Lets go back in time 10 years and look at 2 typical  investors, Jack and Jill. Both are in the same tax bracket, have worked hard and saved a lot of money, $250,000 . Its their life savings. Everyone says they should put their money in the market, where it will grow and fund their retirement. So they did.

Which begs the question, who suffered more stress along the way ? The market investor who has had to endure 10 years of ups and downs and ups and way down in the market, or the Madoff Ponzi investor who lived happily and stress free for 9 plus years and must now face the uncertainty of their SIPC and other claims to get their money back ?

One thought they got the break of a lifetime and through a friend was able to invest with the one and only Bernie Madoff. The other put half their money, $125k, in a mutual fund that matched the performance of the Dow Jones, and half in a mutual fund that matched the performance of the Nasdaq.

Neither touched the money other than to cover the fees and any taxes, which for the sake of this example we will say were the same for both.

Who has more money today ? The person who invested “wisely” or the person who invested with a crooked Ponzi Scheme ?

The mutual fund investor bought their Dow Jones Fund when the market was 9550 in Feb of 1999. That  $125k investment has shrunk to about $95k. They bought the Nasdaq Fund when the index  was at 2342.  Today that $125k  would be worth about $ 77k.  Their $250k nest egg of February 1999 is now worth $172,000 . Thats bad , but not as bad as Madoff’s sucker, right ?

Maybe not. Because the Madoff investor had less than $500k invested, there is a good chance that they could be protected by the SIPC, who is already sending out claim forms. So when its all said and done, the Madoff investor could not only get all their $250k back, but they are also elgible for a share of any funds recovered. While that number may be miniscule, it could mean that SIPC elgible and paid Madoff investors actually made money over the 10 year period, while those that put their money in the market got hit very hard.

The sad thing is, that the same comparison could be made for many blue chip stocks that are down 50, 60, even 90pct or more.

This adds to the general notion that the people who are least hurt from this economic downturn are those who helped creating it. Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system.  A big chunk of it went to continue on pay salaries and bonuses to those who literally caused this, making them even richer. So it is not surprising that, at the end of the day, people who invested with Madooff are better off than those who invested in “safe” mutual funds.

The Danger of Virtual Goods to Your Retirement

The global market for virtual goods was estimated to exceed 2.1 billion dollars in 2007.  Virtual goods are what they sound: virtual clothes, virtual homes, virtual cars. I am hesitant to say how much of it was paid by U.S. consumers, but let’s assume that it was more than 80%.  It means that more than 1.5 billion dollars was spent on goods that have zero value, because they are, well, virtual.

You, the “baby boomers,” brought yourselves to a state of collapse. You made things so bad that only the most ignorant would say you could stay the course.  By bringing your lifestyle to an abrupt halt, you had to take notice.

So take notice of virtual goods. Why? Because your pension fund is probably investing in that through Venture Capital investments. And why it is important? Because this is one of the very few industries the U.S. can out compete its global competitors and balance its debt, making your personal financial future much brighter.

For that to happen, there needs to be an equivalent of the Chinese unfair trading rules protecting their industries and ensuring that their tangible goods are cheaper than of the U.S.

It may sound odd, but if one can ban U.S. consumers from consuming virtual goods , and yet allow the “export” of these same virtual products that U.S. companies “make”, then you just found a growing industry worth billions that balance the trade deficit.  The U.S. has unfair advantage here because of the creativity of its entrepreneurs, and your retirement can be much more secured. Think of it as another form of natural gas that can only be made in the U.S. and export outside.

Unfortunately, this suggested course of action will not happen. What is likely to happen is that U.S. consumers will continue to consume virtual goods, leaving less money for tangible goods and services. This will have net negative effect on the economy as a whole, and further danger your retirement.

So, make sure to ask your pension fund manager if she can push the Venture Capitalist to direct their companies to exclusively export their virtual goods.  It will benefit us all.

Boomers’ Main Risk is Not Taking One

News Flash: Boomers fail to face the truth that they face substantial gaps between their future desires and reality.

Oh, it’s not really news, they know it but not doing anything about it.

The growing healthcare costs, tagged with the current decline in housing and nest egg value, are forcing new ways of coping.  Boomers are essentially left with two main options:
1.    NOT retiring and continue on working till the very last days of their lives.  In every developing country that is the norm, so maybe there isn’t any harm in Americans working till death.
2.    TAKE MORE RISK. Risk and Return Are Correlated – The Higher The Risk The Higher Return, so you might be able to grow your nest egg back.

There is no option 3. Vangurds’ customers in the age of 50 – 64 don’t have enough time to compensate for the average 40% nest egg decline they had in 2008.  If they stick to their current strategy, they gamble that we will have a bull market for most of 2009 – 2024  time period.
Everyone, from Paulson to every financial planner out there, are back at the drawing boards figuring out how to substantially revise their plans. This is exactly what boomers should do. As of today, it includes Bakers as well.
You know you are doing something right if:
1.    You spend 3x – 10x more time on planning and learning. If you spent 2 hours a month on your retirement portfolio planning, make it 10 hours from now on. Read more, as your advisor also had 40% decline in his / hers portfolio, so they don’t know more than you.
2.     Somehow, you create a “pool” of advisors that have different ideas.
3.    Decide: work till death or take more risk. You have to decide, and then act on it. Otherwise, you are facing a crisis in a few years.

Realistically, only 20% or so of boomers will revise their plans and act upon them. The rest are subject to unchangeable behavioral patterns such as lack of discipline, delaying actions in uneasy or complex matters, and planning short term.
However, since there are 77 million people within this category, there is a big prize for those will be able to get the 80% to act.

US Budget ¨ponzi scheme¨

I am posting the below article “as is”. It appears to detail many of the issues that we are working on with regards to empowring middle class America about its financial future. Here it is:

Another American Tragedy is in the making. A much bigger Ponzi scheme that will shock every person in America is still operating. It is being conducted by the U.S. government and your elected politician leaders. It is called our National Budget. With most of our spending on automatic pilot, the aging of the baby boom generation will put tremendous strain on our economic system in the coming years. As you can see, Medicare costs will explode over the next 40 years. The increasing debt will result in interest payments on the debt becoming the largest expenditure in the federal budget. The longer we wait to address this unavoidable train wreck, the more likely it will result in generational war between the baby boomers and younger generations. Mandatory spending for agriculture subsidies, unemployment benefits, civilian and military pensions and health benefits continues to grow. The ponzi aspect of this system is that we continue to pay out benefits by printing money. We are obligated to pay $53 trillion that we do not have. Social Security has run at a surplus since its inception. The money is not in some lockbox. Your trustworthy leaders have spent all of the surpluses ever generated by Social Security to keep the ponzi scheme going.


The following chart proves beyond a shadow of a doubt that we cannot use the Republican Big Lie of growing our way out of this problem. As entitlements and net interest grow, discretionary spending gets squeezed. Non-defense programs, which include, activities related to children, transportation infrastructure, education, training and research that should promote future economic growth and prosperity, are crowded out. We are forced to pay no heed to investments in the future in order to honor commitments made decades ago. The short term focus of Washington politicians has ruined our fiscal future. Children don’t vote, and younger people are less involved in the political process. As a result, the political gain from immediate increases in spending or reductions in taxes outweighs the eventual economic benefits of more politically costly but fiscally responsible choices. This is a criminal and immoral act upon our future generations. President-elect Obama is about to embark on the largest unfunded expenditure program in the history of our country. This will move us closer to the point of no return where the ponzi scheme implodes.


The Government Accountability Office provided a troubling deficit forecast in January 2008 which showed we would reach a fiscal deficit of $1 trillion in 2016. Democrats and Republicans have proven that when they truly work together they can accomplish anything. The $1 trillion deficit will be reached 7 years early, in 2009. Adding enormous new spending programs is like being trapped in a deep hole and deciding to dig deeper. Something called shared sacrifice for the benefit of future generations is essential to avoid another American Tragedy. Shared sacrifice is something that hasn’t been asked of U.S. citizens since World War II. They are known as the Greatest Generation. Now is time for the Next Great Generation.


Bernie Madoff’s ponzi scheme came crashing down when investors requested their money back and no one was willing to give him the funds to pay them off. The American ponzi scheme will come crashing down when our foreign creditors decide to no longer fund our foolish ventures. Foreigners own more than 50% of our existing government debt and have been buying 70% of our new issuances. The Treasury bills and bonds are paying less than 2.5%. Our unfunded liability of $53 trillion increases by $3 trillion per year. Our National Debt exceeds $10.6 trillion. In 2009 and 2010 we will run annual deficits in excess of $1 trillion. The Federal Reserve is printing dollars as fast as humanly possible. Every dollar printed makes the previous dollars less valuable. As our currency is debased, it will eventually collapse. Foreigners will refuse to pour more money down this rat hole. The biggest ponzi scheme in the history of the world will be over.

Friends ask me why I’m such a pessimist. These questions made me consider what I thought would happen over the last few years. I thought that the housing market would decline 10% to 20%. It has declined 30% to 50%. I thought the stock market could decline 30%. It has declined 40% to 50%. I thought our deficits due to wars could reach $500 billion. The deficits will easily exceed $1 trillion. I thought gold might reach $600 an ounce. It reached $1,000 an ounce and is poised to go much higher. All of my pessimistic projections have been surpassed to the downside. Examining Alexander Tyler’s stages of democracy, I am optimistic we can avoid the final stage of Dependence back into Bondage. It seems inconceivable to me that our country could fall under the rule of a dictator. But in the midst of a total economic collapse, I guess anything is possible. Let’s hope my worst fears are not realized. If enough Americans seek the truth, the Big Lies can be exposed before it is too late. Truth is the mortal enemy of the lie.