Investing in a world where ponzi schemes exist

How can any investor trust those to whom he/she sends money?  I'm sure everyone feels safe from fraud when buying funds from Fidelity or Vanguard, but how can any investor know if the manager of the investment portfolio is honest, ethical, or a cheat?

The truth is that there are very few ponzi schemes.  But when discovered they make for a big news story.  I compare it with an airplane crash.  The safe landings are ignored (not newsworthy) and only near misses and crashes make the news.

We are all told to do due diligence, but what does that mean?  You can't just walk into the company office and demand to see their brokerage statements and proof of authenticity – not unless you are investing a ton of money – or the firm is small and welcomes potential new investors with open arms.

The statement of auditors is supposed to provide the needed evidence of honesty, but Madoff proved that even auditors can be untruthful (or incompetent).

It's not so easy to know who can be trusted.  That's one reason for DIY (do it yourself) investing, and for most visitors to this blog, DIY is the method of choice.

But, there are investors who have neither the time nor inclination to make investing decisions for themselves.  Those who want to hire professionals ought to be able to do that with complete confidence that their money is safe from fraud.  Not safe from investing losses – just safe from theft.

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There are plenty of financial planners who are eager to take your money, invest it according to 'prudent man' rules that were written decades ago, and charge a fee for that so-called service.   

There are few investment opportunities for those who want to own investments hedged with options.  There are some mutual funds that write covered calls, but they tend to be active managers who try to outperform the market averages by selling calls on only a portion of their holdings. That defeats the purpose of hedging.

If you are seeking such a fund, unless there's a broker who collects a commission for selling the shares, or the fund has sufficient assets to advertise, you are not going to know it exists.  Of course, each fund should have a web presence, but how do you know whether you can trust an investment company when the only information comes from the Internet?

In my city (Chicago) there are TV ads encouraging investors to 'investigate before investing' but there is no information on how to do that.  Who would trust the Better Business Bureau on an issue related to investing?  Not me.

All this brings me to my point:  I've been in touch with someone who runs a covered call portfolio.  Everything I see tells me this is an honest man, managing a portfolio of exchange traded funds.  He writes OTM covered calls on 100% of the portfolio, and to hedge market risk even further, one of his funds is equivalent to being short SPY (this is NOT a leveraged ETF).  All in all it seems to be a good place for the individual investor who cannot or will not manage his/her own funds. 

To top it off, he touches none of your money.  Each customer opens his/her individual account with a well known broker and the manager makes the trades.  Best of all, there's none of that 20% hedge fund management fee.  His fee is based on the amount of money under management, but approximates 1.5% annually.

I am not sufficiently familiar with the operation to sing it's praises, but I've learned enough to be satisfied that it's worthy of your consideration - if such an investment appeals to you.

My problem is: do I tell you who this is and how to get in touch?  It seems completely on the up and up.  I've seen records of positions.  If he never touches your money, there is no way this can be dishonest – or at least that's how I feel.

To learn more, write to Kevin Simpson:Invest@covered-call.com or visit his website

If you let him know you found his site via this blog entry, I would appreciate it.  Full disclosure: I'd earn a small referral fee.

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2 Responses to Investing in a world where ponzi schemes exist

  1. greg 11/20/2009 at 7:55 AM #

    Hi Mark – If you, MDW, were an active investor in RUT using it for an income stream what collar would you use? 95/110 or 90/100, etc. And you don’t mind buying and selling your RUT shares.
    PS Personally I appreciate information on resources and your willingness to share.
    Thanks
    Greg

  2. Mark Wolfinger 11/20/2009 at 8:30 AM #

    Thanks Greg,
    I would definitely be selling ATM, or calls that are no more than 2% OTM
    I believe 5% OTM puts are good enough to provide all the protction that’s needed.
    Thus: 95/100 to 95/102.
    If RUT were 598, I’d write the 600 call.
    As an aside RUT is cash settled, but I’d still use 95/100 when shares changed hands.