The Bernard Madoff Scandal Brings up Questions of Trust

Featuring Lutts’ Logic:

Bernard Madoff Loses Some Friends

Who Do You Trust?
A Buy Signal For Chinese Stocks!

Ever since the story broke last week that Bernard Madoff had lost perhaps $50 billion of investments entrusted to him by friends, hedge funds, charities, etc., I’ve been looking for the answers to a few questions.

When and how did it first go wrong?  Was there one leveraged investment that went bad back before 1999, when the SEC first “investigated”?  Did he dig himself out of that hole only to fall into another one or has he been producing bogus statements steadily since then?  Who on the inside of the company was aware of the fraud?  And what was the conversation like between father and sons before they turned him in?

One thing is clear; the man will now find out who his true friends are.

The same might be said, as well, for Governor Rod Blagojevich, who has succeeded in perpetuating Illinois’ reputation as the place where politicians think first of themselves, and second, of their constituents.

In both cases, trusts were betrayed.

So let’s talk a minute about trust.  How do you know whom to trust?  Most of us trust family and friends.  We also trust people who are referred by them.  A lot of us don’t trust politicians.  We trust people who’ve dealt fairly with us before.  And, to a certain extent, we trust major institutions.

I know, for example, that Verizon will not intentionally swindle me.  At the same time, I can’t trust their repairman to arrive when promised.

And when I drive on the Massachusetts Turnpike, while I trust that my toll will ensure passage to my chosen exit, I also fear that individual employees of the Massachusetts Turnpike Authority are defrauding the state (and thus me) by claiming false overtime, undeserved disability pensions and more.  But I can’t do much about it, except vote in ways that minimize the Authority’s growth and power.

I’m not sure how it’s happened, but over the years I’ve become more sensitive to the issues of right and wrong.  Following this interest, a few years back I bought a book on Amazon called “Doing the Right Thing; Cultivating Your Moral Intelligence.”  Unlike traditional books on morality, this one is neither academic nor religious; instead it recognizes the complex choices people must make in the world today, and presents ways to think through them, in order to make the best choices.  I think it helped, and I recommend it. 

In fact, I think Bernie Madoff should have read it. 

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Now let’s talk business.

My father, Carlton, was and is an avid growth stock investor, and he began writing and publishing the Cabot Market Letter back in 1970 because he wanted to share his ideas with other investors.

I grew up with the business, so l know a lot about both investing and publishing, but at heart I’m more of a publisher, so I hire investment experts to deliver the nuts-and-bolts content of our various investment advisories.

Now, a major truth about the publishing business, whether it’s newspapers, magazines, or newsletters, is that the profits are in the renewals, not the first-time customers.  It costs money to get a first-time customer, so we work very hard to deliver high-quality content that will compel readers to renew their subscriptions.

And one way we do that is by acting honestly.  In fact, part of our mission statement says that we will “conduct all our affairs honestly, not only because our independence and trustworthiness are major assets, but also because it’s the right thing to do.”

Another way we convince subscribers to renew is to give good investment advice.

For example, until this year, Chinese stocks were red-hot and investors who put a lot of money in the right ones saw terrific profits.  In 2006, Cabot China & Emerging Markets Report was the top-performing newsletter, with a gain of 78.6% (according to Hulbert).  In 2007, Cabot China & Emerging Markets Report was #1 again, with a gain of 74.1%.

At the market top, back in the fall of 2007, the situation was glorious.  Getting new subscribers when the newspaper headlines were screaming about profits in Chinese stocks was relatively easy.  But I know from experience that markets go in cycles, and when everybody is feeling wonderful about a trend that has proved very profitable, that trend is likely to change.

It happened in housing, as we all know.  And it happened in Chinese stocks, too.

Yes, the Chinese market, like the U.S. market, topped out in October 2007, and began a long decline–just like the U.S. market–that didn’t end until last month.  But the good news is that Cabot China & Emerging Markets Report didn’t stay heavily invested! Instead, under the able leadership of editor Paul Goodwin, it cut back dramatically early in 2008, telling investors to sell their Chinese stocks and go to cash. 

And that worked out very well.  As of the end of November (Hulbert’s last measurement period), Cabot China & Emerging Markets Report was still a top performer, with an annualized return over the previous three years of 34%, compared to a negative 1% for the DJ-W 5000.

And now I have further good news.  Just this week, Paul received a buy signal from his Chinese market-timing indicator and began buying Chinese securities again, specifically, one stock and one ETF.

So from my perspective, while October 2007 was an “easy” time to invest in Chinese stocks (because of the great headlines), it was the worst time.  And while today is a difficult time to invest in Chinese stocks (or any stocks), because the news is terrible, it’s likely to be the best time.  That’s how the market works.

So, if you’re willing to risk some of your portfolio in the fast-growing Chinese market (and perhaps Brazil, India and Russia as well), I suggest that now is a great time to try a no-risk trial subscription to Cabot China & Emerging Markets Report.  Find out how below.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

Editor’s Note:  Cabot China & Emerging Markets Report was the first of the Cabot investment advisories to begin moving from cash to stocks this week.  Cabot Green Investor was the second.  And Cabot Market Letter is likely to be the third.  You don’t need them all, but you do need at least one if you want to take full advantage of the developing bull market.  Click below for details.


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