Looking for Bernie Madoff

If you could get the candid assessment of the financial markets from a lot of investors today, it would probably be something like returns are low and risks are high. That explains why so much money, especially that held by individual investors, remains in bank accounts, money market funds, ultra short bond funds and other relatively low risk places. The financial markets have given us so many unpleasant surprises in the last 3 years, people are afraid the future holds more.

At the same time, with incomes stagnant and inflation increasing (regardless of government statistics and what high ranking government officials claim), many are under pressure to seek higher returns from their savings. There's nothing wrong with looking for a better return. Just remember that, even though we now live in the era of the endless bailout, there still isn't a free lunch. Unless you're a major bank, a sovereign nation, or a very large business corporation. Stocks and lower rated bonds might offer greater potential for profit, but they also offer greater potential for loss. Risk and reward walk hand-in-hand down Wall Street.

Some investment products include guarantees against loss. These often are touted by insurance companies and should be scrutinized closely. The promise against loss is going to cost you. It could be in the form of tight limits on upside returns (i.e., if the product generates a return, the insurance company is going to keep a good portion of it), stiff penalties for early termination or withdrawal, and in other forms. Remember that if the markets perform poorly and your return is zero, even though your losses are also zero, you would have been better off in passbook savings. (That's not a theoretical point; anyone who put money in passbook savings ten years ago instead of stocks is ahead of the market.) While no one knows what the future will bring, investing in a no-lose product doesn't mean you'll win.

Even though many insurance companies might want to sell you a lousy deal, in general they aren't fraudsters. The worst thing you could encounter in your quest for higher returns is the markets magician who claims to consistently produce good, albeit not spectacular yields, day in and day out, year after year. No one can do that, period. If you meet anyone who says he or she can, put your hand on your wallet and run away. Fast. No matter how tempted you are, and no matter how good the sales pitch sounds, don't invest.

The biggest frauds are perpetrated, not because the bad guy lies, but because investors lie to themselves. They convince themselves that lead can indeed be turned into gold. They brush aside contrary evidence and the rationality of naysayers. They want to hear, however improbably, that good returns can be secured with no risk. They seek out the con artists who promise the sun, the stars and the moon.

Bernie Madoff didn't have to find many of his victims. They found him, and they were ready to believe every word of his web of lies. He'll be in prison for the rest of his life. But there are plenty of latter day Bernie's around. Often, the gullible and greedy will find them. As a matter of law, the con artist is liable and should be punished sternly. As a matter of reality, if you go looking for a latter day Bernie Madoff, you'll probably find him. And you'll regret it.

Investing in Hard Times

With real estate, stocks, corporate debt, and almost all other assets declining, it's tough to figure out what would be a good investment. But hope springs eternal. Old fashioned American optimism will always find an outlet. Maybe you'll find investment inspiration below:

Dog Food Manufacturers. Inflation of food prices is close to the double digit level. People will turn away from filet mignon and lobster, and toward less expensive alternatives. Sales of dog food could rise, and not necessarily because dogs are being treated better. Dog food manufacturers might jump on this bandwagon and bring new gourmet offerings to the market.

Big Breweries. Think about the large, national breweries that produce the cheap swill and malt liquor that gives you a big bang for the buck. They will probably enjoy increased sales at the low end.

New York City Food Cart Permits. As Wall Street cuts back on expense accounts, $1,000 bottles of wine will sit on store shelves, and hot dog vendors in Manhattan will see sales increase. When you consider that ketchup, mustard, onions, relish and sauerkraut can all be classified as vegetables, the hot dog looks better and better when you have less than $5 for lunch.

Real Estate Opportunities. Afficionados of late night television know that there are always opportunities in real estate, and hard economic times are no exception. Even when people are down and out, they still need a place to live. Think about mobile home parks, welfare hotels and slums.

Credit Card Companies. Even though the Federal Reserve has been lowering interest rates, many credit card customers have had their interest rates raised. Increased fees have also been imposed. If you're being gouged, consider investing in credit card companies as a hedge against your losses. If you haven't been gouged yet, think about how likely it is that you will be gouged in the future (have you ever met a nice credit card company?) and consider credit card companies as a way to offset future expenses.

Electric Utilities. With the deregulation of electricity, utilities aren't as predictable an investment as they once were. However, many people will be faced with a choice as to what bills to pay. Electricity is used for an enormous variety things today. For example, how could you face your family every evening if the big screen TV couldn't be turned on? How would you keep your sanity if your kids weren't diverted by mind-rotting computer games? As you cut back on restaurant meals, how could you "cook" without the microwave? The electricity
bill will be paid before many other bills, so electric utilities might turn out to be a good investment.

Yellow Mustard Manufacturers. Yellow mustard goes well with bologna, pepper loaf and a variety of other inexpensive meat products. It also helps to mask the flavor of day old and rancid food. Yellow mustard manufacturers can look forward to flush times.