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The surprising 'why' behind Bernie Madoff's ponzi scheme

The surprising 'why' behind Bernie Madoff's ponzi scheme


In the world of finance and investing, you'd be hard-pressed to find someone more infamous than Bernie Madoff. "Madoff defrauded thousands of investors out of tens of billions of dollars over the course of nearly two decades", writes NPR's Rachel Teisman.

Madoff was found guilty of eleven felony charges that included securities fraud, investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, and more. When Madoff passed away at age 82, he was serving a 150-year sentence in federal prison.

In his recent book, "The Psychology of Money," Morgan Housel uses Bernie Madoff as an example of what can happen when one can't find a sense of enough.

Housel writes, "Before the Ponzi Scheme that made Madoff famous, he was a wildly successful and legitimate businessman. Madoff was a market maker, a job that matches buyers and sellers of stocks. He was very good at it."

Housel goes on, "A former staffer said the market-making arm of Madoff's business made between $25 million and $50 million per year. Bernie Madoff's legitimate, non-fraudulent business was by any measure a huge success. It made him hugely—and legitimately—wealthy."

Madoff was already legitimately wealthy before his Ponzi Scheme, which naturally leaves one to wonder, why?

Housel offers a simple explanation: Madoff had no sense of enough.

No matter the level of wealth he achieved, he always wanted more. His ambition outpaced his achievements, which led him to create a fraudulent investment scheme, promising outsized returns and using new inflows to pay out old investors. There are many stories similar to Madoff's. Well-to-do individuals who've achieved a level of financial success, but still desire for more. That desire for more is what drives them to do crazy things, and risk it all.

Most of us will never reach the level of wealth that Madoff achieved before his Ponzi Scheme. Still, Housel points out, "...a measurable percentage of those reading this book, will, at some point in their life, earn a salary or have a sum of money sufficient to cover every reasonable thing they need and a lot of what they want."

So when we reach financial success, what can we do to find a sense of enough? Here are a few tips to consider:

1. Practice gratitude for the things you have. One of the best ways to find contentment is to focus on the things you currently have. Many people do this by writing in a gratitude journal daily or weekly. This can be as simple as making a list of all the things you're grateful for, no matter how big or small. Studies show that practicing gratitude can provide higher levels of happiness and satisfaction, two key ingredients for a life well-lived.

2. Understand the effects of social comparison. In his book, Housel uses the example of a rookie baseball player making $500k per year. By all outward appearances and definitions, he is rich. But to him, playing on the same team as Mike Trout "who has a 12-year, $430 million contract", the rookie doesn't feel all that rich. The same thing can apply to our lives. We compare our lives to the people we work with, live near, and are connected to on social media. When a neighbor drives home in a brand new car, we begin to wish we had one, despite how much we enjoy our current vehicle. By simply being aware of the effects of social comparison, we can start to discern whether we really want something, or we're just letting social comparison take control.

3. Recognize that the goalpost doesn't have to continue moving. There's nothing wrong with achievement, but be aware of the endless ambition and desire for more. This is the force that can drive seemingly successful individuals like Bernie Madoff to commit fraud in pursuit of the next million dollars. The fact is, it doesn't have to be that way. One step forward doesn't have to push the goalpost two steps further. In his book, Housel attributes much of his financial success to his and his wife's ability to continue living like college students, well after graduating. He writes that they've been able to achieve financial freedom in their lives by being happy with what they have, and realizing that many of the best things in life are free.

4. Don't risk what you have and need for what you don't. For many families, there will come a time when they've reached a certain level of financial independence and have secured a healthy retirement nest egg. That's the point at which it's essential to recognize they no longer need to take excessive investment risks in search of outsized returns. They've reached a level of success and wealth that they're happy with; why risk it in pursuit of something they don't need?

TrueNorth Wealth is here to help.

At TrueNorth Wealth, one of Salt Lake City's leading wealth management firms, we understand the common pitfalls families face on their path to financial freedom. We know the difficulty of balancing the desire for more with finding a sense of enough, all while investing for long-term success. That's why we help our clients secure their future by pairing them with a dedicated CFP® professional, backed by an incredible team.

Our goal is to help each of our clients build and secure their wealth through academically sound, financial planning. We love to teach each of our clients "how" and "why" we lead with the investment philosophy that we use. Call us today and schedule a time for us to teach you that investment philosophy and begin reviewing your financial position.

For our team at TrueNorth, it's about so much more than money. It's about serving families all across Utah and Idaho and helping them achieve freedom and flexibility in their lives. To learn more or schedule a no-cost consultation, visit our website at TrueNorth Wealth or call (801) 316-1875.

Joe Griffin Ceo, TrueNorth Wealth


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