Madoff fiasco: a reminder why property's tops

Investors have been dished up another great reason to invest directly in assets like bricks-and-mortar and forgo all temptations laid in their paths by so-called investment professionals and intermediaries: The Madoff saga in the US.

For the uninitiated, this is yet another money scandal of staggering proportions to send shock waves through global financial circles. In broadbrushstrokes, Bernard Madoff is a US investment broker manager and former Nasdaq chairman who allegedly masterminded a US$50bn Ponzi - or pyramid scheme.

This is where a business or investment cannot produce returns on its own but relies on money brought in by newcomers to pay those already in the system. Sounds simple, but Madoff apparently managed to fool many highly educated professionals in the international financial services world.

Big global companies, including large banks, with employees who should know better invested client funds via various schemes and funds in Madoff's offering.

Critics have been asking what funds of funds were doing channelling client funds to a Ponzi scheme. The big question: What happened to due diligence?

Back in South Africa, funds of funds have proved highly popular and have been recommended by financial intermediaries to their clients.

You may not know your money is in a fund of funds, however this is the underlying structure for many company pension funds.  They are also popular among hedge fund investors, who feel more comfortable divvying up their money across a range of opaque funds.

Essentially a fund of funds is a collective scheme that takes your money and in turn invests it in several funds.

The idea is that the "fund of funds" professional is skilled at choosing the best investment managers and, because these individual managers are human, it is a good idea to spread the risk between them.

So, for a healthy fee the fund of funds' manager will carve out your savings between these other professionals.

Unfortunately, the extra layer between you and your money means less money for you in the long run because costs eat into your returns. That until now has been the biggest reason to avoid a fund of funds investment.

The Madoff saga highlights another evil associated with funds of funds: risks associated with the gatekeeper.

It is all very well spreading your risk between asset managers who may or may not deliver returns. But what about the actual fund of funds' manager?

How do you know you are in good hands? That this highly-paid manager is doing the job properly? Or merely ticking boxes?

Answer: you don't really know - is what has been elucidated by the Madoff matter.

So if we can't trust the fund managers or the fund of funds' managers, what are we to do?

Simple: be a do-it-yourself investor and keep things straight-forward.

The easiest, most transparent asset class for us mere mortals who don't have several post-graduate degrees in high finance, as no doubt many of the Madoff-linked investment professionals would have behind their names, is real estate.

What you see is usually what you get with property when you invest directly. The risks are fairly obvious and, provided you do your home-work, don't over-gear or over-capitalise and stick to a longer-term period, you can't go wrong.

You are in control of your investment. Generally, you can see trouble coming: an area might be decaying or a tenant starts paying late, are some of the examples.

This is unlike the many collective schemes on offer out there where by the time signs of trouble emerge it is generally too late for the nameless, faceless investors to extricate themselves from an ugly mess.

As the Madoff debacle illustrates for investors: if you don't understand what you are invested in and can't see through the structures, stay away. 

* Jackie Cameron is editor of Realestateweb - South Africa's premier property news portal. Write to Jackie@realestateweb.co.za.

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Do you think property will gain in popularity as an investment thanks to scandals like the Madoff saga? Or do you think collective investment schemes and hedge funds will remain a tantalising choice for individuals? Share your views, below.

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responses to this article

the US housing bubble that burst: a reminder..... .....that anything can go wrong anywhere if you do not know what you are doing. can not belive that moneyweb actually published this one-sided ill-informed and basically misleading piece. by mok on December 15 2008, 14:12 Find this comment inappropriate? Report it

Jackie, obviously you... just don't realize that real estate is just a legalized form of pyramid scheme!! You are really scratching the barrel! by Sipho on December 15 2008, 14:23 Find this comment inappropriate? Report it

Invest with Allan Gray and you can be sure it will be above board and you will get good returns. Currently property will be up and down in the short term and u need toknow the market for a good investment. Investing to rent out is also risky and you will have to subsidise. by pj on December 15 2008, 14:43 Find this comment inappropriate? Report it

Very poor journalism Real estate investing has its own risks and potential disasters, eg an international credit crunch, a geo-political implosion or a complete black-swan event which we cannot even imagine until it happens. by BB on December 15 2008, 14:51 Find this comment inappropriate? Report it

Please keep publishing Jackie's pic with these articles. Thanks! by pfp on December 15 2008, 14:51 Find this comment inappropriate? Report it

Property is not immune from the same scams Property can also have exactly the same type of scams - check out Sharemax and this week's Financial Mail on the all the property development scams. All investments (property included) can go bad if you don't pay attention to them and blindly . .more give your money to other people hoping they will act in your best interests. The solution is to invest directly in your chosen assets (be they shares, property, gold etc) with as few "middle men" as possible to eat away at your returns. . .less by Andrewla on December 15 2008, 14:54 Find this comment inappropriate? Report it

Absolute nonsense Jacky, you have absolutely no idea what you are writing about. To try and make a connection between Barney Maddoff, fund of funds and real estate requires a huge leap of logic. Many fund of fund mangers and advisors warned against Madoff for . .more precisely the reasons you are criticizing fund of funds--due diligence. But even the best due diligence cannot protect against out and out fraud. Madoff's funds were marketed in SA and even our teeney weeney little company did not like what we saw ...and declined to get involved. Fund of funds is the only way to go in for SA investors who generally have no clue what and where to invest their money. And the most important reason of all:no CGT within a fund of funds whereas discretionary investments managed individually all attract CGT on sales and redemptions. . .less by Financial Virgin on December 15 2008, 15:12 Find this comment inappropriate? Report it

Great article Transparency is the word for investing. If you buy a fairly good property in a fairly good are with fairly conservative debt you will do better than fees on fees, lies and lots of hot air! by SAM on December 15 2008, 15:27 Find this comment inappropriate? Report it

Simple Simon says Jackie, if only it was so simple. Not even the current Acting President, supposedly a good risk, pays rent and destroys the place he is in costing the owner a huge some of money. Ask him if property is a good investment. There is a risk in all types of . .more investing, however your reporting should reflect that and not the simple philosophy of your article. . .less by Grant on December 15 2008, 15:31 Find this comment inappropriate? Report it

Inexperienced Journalist After reading only 6 postings, my viewpoint has been summed up! Whoever this Jackie Journalist is, he/ she is extremely biased to one asset class, therefore inexperienced and forgetful of what can happen when investing in any asset class! There are always . .more fraudsters out there! I think Jackie is a fraudster and has been paid off by some estate agent or property syndicator, to "talk their book"! . .less by Rogue on December 15 2008, 15:34 Find this comment inappropriate? Report it

Masterbond Does anybody remember Materbond ? Some real funny property deals there by Master on December 15 2008, 15:59 Find this comment inappropriate? Report it

Masterbond etc. Master, correct me someone if I'm wrong, but I don't recall Masterbond being a direct property investment. Weren't there some funny debentures involved there.? Anybody out there old enough to remember? Property may have been involved but hardly . .more direct property investment. As for direct property being a pyramid scheme...huh? You buy it yourself, you hold, you receive a return in rental. Then you sell later and make a profit. Where's the pyramid? . .less by Fanny Pancakes on December 15 2008, 16:36 Find this comment inappropriate? Report it

Allan Gray Even Allan Gray has bad performance periods. by Bert on December 15 2008, 16:37 Find this comment inappropriate? Report it

Property ... now there is a Ponzi scheme of note Property has been the biggest Ponzi scheme in the largest decade - so big that now that it has collapsed, the global financial system is being strained to the max. by CJ Says on December 15 2008, 16:57 Find this comment inappropriate? Report it

In all fairness she did say DIRECT Those saying property is subject to same fraudulent practices, need to read a little closer before going off half...baked. by Duh! on December 15 2008, 16:57 Find this comment inappropriate? Report it

Lazy journalist Just stumbled across this article and I am astounded as to how you could believe this C***. All investments carry risk, property included and if you have any exposure to US or Europe you will realise that property is currently a large factor in many . .more people losing their skin. Someone mentioned Black Swan and if you really want to write something with a little gravitas you could do worse than read the same titled book and then Fooled by Randomness. I reiterate what I said all investment carries risk, to suggest property is a safe bet is ludicrous! . .less by Wishee71 on December 15 2008, 16:59 Find this comment inappropriate? Report it

Scraping the barrel This has to be one of the most naive articles I have seen in a very long time. Whatever modicum of neutrality of journalistic integrity Jackie, or indeed Realestateweb / Moneyweb may have had has been squandered. One has to beg the question - is this . .more hopeless incompetence on the part of Jackie, or is she just talking up her advertisers' book? Either way, she has sullied her name irreparably. Extremely disappointing, but I suppose enlightening for us to see the true colours come out. In many previous articles I have given her the benefit of the doubt, assuming that she knew more than the average, being closer to the game than most, but this has nailed her colours to the mast in a most emphatic manner. . .less by Ursa on December 15 2008, 17:09 Find this comment inappropriate? Report it

Smoke and mirrors This is such stupid advice - buy property - once you have deducted the carry costs (interest and taxes) and the fact that all houses change prices at roughly the same rate kindly explain how you make money. Transaction costs are almost 20 percent from . .more buy to sell!!! . .less by conrad on December 15 2008, 17:11 Find this comment inappropriate? Report it

This article proves that one can go through the bottom of the barrell ... and start digging. You should be very ashamed of yourself JC for publishing what I'm sure will be the last article I read on this website. Utter bull by Farsood Pillay on December 15 2008, 17:39 Find this comment inappropriate? Report it

yes "wishee71" I am sure you just "stumbled" on the article read carefully what she is saying "invest direct" you blithering idiot also if you have a six month time horizon and invest in a bubble will then you deserve to be burnt, ask any one who has been in property for years not just the past three! by wisheeutonsil on December 15 2008, 18:13 Find this comment inappropriate? Report it

Please explain To all those who have said here that property in a pyramid scheme , please explain yourself... In my simple mind there is a buyer and seller , the seller wants to make money and the buyer is hoping that he can profit on it at a later stage.... This is no . .more different to any other investment (gold,shares,currency etc) , and is no different to any form of trade. And CJ , be sure to press that Submit button this time....would hate to see your good work go to waste again . .less by Gem on December 15 2008, 18:14 Find this comment inappropriate? Report it

wisheeutonsil / blithering idiot Who mentioned six month time horizon! As it happens I have just purchased a business in SA and happened to be looking into some old press articles, so yes, I did stumble across the article. I don't really have the time to go into this in depth . .more but what I am trying to say is that treating property as a bank (which many people do by leveraging equity etc) is not a wise idea, as witnessed by many buy to let investors. I agree invest in a bubble and you deserve to be burnt, but it does not detract from the essence of my disbelief at a lazy article. Property should be treated as a place to live and if you make more than you paid for it fantastic, likewise any investment as the saying goes can go up or down the crux of the matter is that property is not any better. . .less by wishee71 on December 15 2008, 19:40 Find this comment inappropriate? Report it

agree agree agree "All investments (property included) can go bad if you don't pay attention to them and blindly . .more give your money to other people hoping they will act in your best interests" As a student of human nature I can gaurantee they will act in THEIR NOT . .more YOUR best interests. "Transparency is the word for investing. If you buy a fairly good property in a fairly good are with fairly conservative debt you will do better than fees on fees, lies and lots of hot air!" It works for me and is working for my parents! " This is such stupid advice - buy property - once you have deducted the carry costs (interest and taxes) and the fact that all houses change prices at roughly the same rate kindly explain how you make money. Transaction costs are almost 20 percent from . .more buy to sell!!! " HMMMMMMMM Roughly the same price in beer tokens NOT rands and I think you have forgotten a little something called RENT also paid in beer tokens. Transaction cost is 20% ayear if you buy and sell in same year but 1% (less than most brokerage fees or what a bank (see C.J) charges you for depositing cash) if spread out over the 20 years I consider to be a minimum for holding property......remember property is a long term investment! . .less by andrewa on December 15 2008, 20:20 Find this comment inappropriate? Report it

Wishee washy Your statement that houses should be to live in , not investment is as senseless as saying there should be no trading in shares , or metals , or anything..... so what , you just earn cash and stick it in the bank...Go back to Communist times and 50 years . .more back and preach your hogwash there. . .less by Gem on December 15 2008, 21:23 Find this comment inappropriate? Report it

Bwahahahaha Yeah right Jackie because property's not a 90:10 venture. 100million yours by Anon on December 15 2008, 23:43 Find this comment inappropriate? Report it

Hey Jackie! Remember Sharemax? What sector of the market were they in again? by CT Bubble on December 16 2008, 07:33 Find this comment inappropriate? Report it

NO BROKERS OR AGENTS - GEEN SMOUSE do not give your money to any broker - Period. unless its directly within a solid banking institution like any one of our major banks. no agents, brokers - NOTHING. Masterbond never quite taught us a lesson. its never ceases to amaze how people with . .more surplus funds entrust it to these skimmers. otherwise place it with Std Bank at 10% or thereabouts and go to sleep. Give it to a broker and lose plenty sleep. . .less by msholozi on December 16 2008, 07:56 Find this comment inappropriate? Report it

Property is a way more safer option The property market might be in the doldrums now but i bet you that no one that posted a response to Jackie's article has ever lost money on property and I'll further bet that some of them have lost on the financial markets. Property is not a quick way to . .more make money but its the safest way to financial success. . .less by Papashengo on December 16 2008, 08:08 Find this comment inappropriate? Report it

The Name of the game is gearing Direct property investments, when done right, offer enormous gearing potential and if you are clever, some tax-breaks along the way. I am 34 with 5 properties, 4 earning an income. I started early and my monthly nett contribution is less than R2000. I . .more get growth of at least the inflation rate (10%) on R3.5 million per year (R350 000) and that for less than R2000 monthly contribution. Show me a unit trust fund that can do the same. I put my money on property. It produced alot o wealth over the past 30 years so I bet the same for the next 30 years. I will not let anyone else get rich from my money! . .less by JD on December 16 2008, 09:31 Find this comment inappropriate? Report it

Property syndicates, schemes Hey CT Bubble...Sharemax, Masterbond - surely these aren't direct property investments? There are many schemes that are sold on the basis of their property flavour but are not direct, DIY property investments. Incidentally, I also think it is a far . .more better idea to invest directly in shares or an index tracker through a stock broker or even a balanced unit trust fund where one fund manager makes asset allocation decisions than an opaque set up with layers of mouths to feed. You don't need to be a fund of funds' manager to choose the top fund managers: it is all there for you in the performance tables (long-term record, risk ratio etc). . .less by Jackie Cameron on December 16 2008, 10:17 Find this comment inappropriate? Report it

In Jackie's defence She does talk about DIRECT investment in bricks , and not Sharemax type structures or any other way of ownership "This is unlike the many collective schemes on offer out there ..." "...with property when you invest directly. " by Gem on December 16 2008, 10:17 Find this comment inappropriate? Report it

let's see jackie's pic again and not just the mugshot by charlie on December 16 2008, 10:42 Find this comment inappropriate? Report it

What do you mean by 'property's tops' Do you mean that the risk adjusted returns from directly held residential property are superior to other asset classes. If so it is only the North Koreans, the Cubans and Jackie Cameron who still don't believe in the Market. by Verde on December 16 2008, 12:17 Find this comment inappropriate? Report it

fire jackie ok, it's reached a point where "jackie" is showing that she has ABSOLUTELY NO CLUE" moneyweb.............do yourselves a favour.....get rid of her..........you're starting to look bad.........BIRDS OF A FEATHER!!!!!!!!!!!!!!!! by super duper on December 16 2008, 15:15 Find this comment inappropriate? Report it

Jackie time for you to get a real job Enough is enough , you clearly do not have the ability or experience to write and comment on anything financial let alone property related . Your article is complete rubbish. by Time to go on December 16 2008, 17:45 Find this comment inappropriate? Report it

RE: Trolls Dont worry about the last bunch of commnents Jackie they must be stock brokers or insurance salesmen after all the saying is......As safe as stocks and shares..........no its not that, how about As safe as a retirement annuity........no its not that . .more ..........As safe as a fixed deposit (this ones for C.J. - no deposit insurance in RSA)..........no its not that.................As safe as houses..........YES thats the one, so race memory says Jackie IS correct An Andrewa quiz, pick an answer and justify it with a post Q: How do you become wealthy?" A1: Dont sell the property your father and grandfather leave you, or the property you buy yourself A2: Put your money in the bank (that answer is for C.J.) A3:Buy retirement annuitys A4:Buy monthly investments from a financial adviser A5: Listen to your stockbroker and buy what he advises Race memory for answer 5 " Q: "how do you make a small fortune on the JSE?" A:"start with a large one!" . .less by andrewa on December 16 2008, 20:14 Find this comment inappropriate? Report it

@JD Ah someone else with the ability to do simple arithmatic.R3.5m property. R2k subsidy kick in this year. At standard landlord trade union rentals R20k nett monthly income. Inflation linked rental next year after increases R22k. Assuming no further bond . .more rate increases/decreases time to buy another property next year if you dont mind subsidizing, if not then year after next (rental income R24.2k). Remember your tenants are paying for your R3.5m worth of assets as of the next rent increase and it is almost as much hard work to destroy a property as it is to build one just less skill necessary.....thats why tenants dont destroy buildings and as you say R350k capital gain on average per annum taxable ONLY when you sell (so why sell?) . .less by andrewa on December 16 2008, 20:25 Find this comment inappropriate? Report it

For gem and andrewa Gem - whenever people buy an sell an assett with little regard to its cost or traditional value because they believe the price will just keep going up so it can always be sold at an ever greater price ... THEN you are in a bubble. That is what happened . .more with property over the last decade. Andrewa - how about exchanging your infamous beer tokens for something more realistic like gold - oops , there goes your argument - property valued in gold has been crashing for 7 years. . .less by CJ Says on December 17 2008, 06:51 Find this comment inappropriate? Report it

For JD I bet you didn't get 10 % growth this year. Also, if you had bought your 5 properties last year with your gearing, and rented them out, I suspect you would be in serious financial trouble by now. You rode a huge bubble and feel rather . .more smug - the problem is this is not a repeatable way to invest in the present market or in this stage of the property cycle. . .less by CJ Says on December 17 2008, 06:55 Find this comment inappropriate? Report it

to CJ I do not understand you definition of an investment then....One ONLY invests if they think the price will appreciate. What do you do with your cash that your successful business is generating ? Put in a bank ..... I am sorry but except for the last few . .more months that is not an investment. . .less by Gem on December 17 2008, 10:05 Find this comment inappropriate? Report it

To CJ re JD CJ , JD and all the ones on here that are so called property bulls , speak of INVESTING in property. As above , you are always coming up with last year....If someone buys last year and expects a return within 12 months , that is not an investor but a . .more speculator....There is a difference. JD , Andrewa , Brennan and I am sure others , bought over the past 10 years ( at least) , INVESTED.... we did not buy and flip , which would be SPECULATING. . .less by Gem on December 17 2008, 10:09 Find this comment inappropriate? Report it

for gem Houses should go up with inflation - shares should go up when a company makes more money ... in a ponzi bubble these things become irrelevant - prices go up because people believe someone else will buy off them for an even greater price and they in turn . .more buy for the same reason - it works very well ... until the bubble pops. The last ten years included a huge bubble - the ten years after that include a huge crash and global financial meltdown - don't expect the latter to create the same results as the former. If your property 'investment' is going to incur huge losses in its early years then why not simply wait till the bad times are over before investing. There will be a time, some time in the future, when you can buy a property and not make a huge loss in the first year. That would be the time to buy I would suggest. Why rush in and buy now when losses are pretty much guaranteed for the near future. . .less by CJ Says on December 17 2008, 11:17 Find this comment inappropriate? Report it

CJ Disagree. A house should go up with inflation as much as a stable company's shares should go up with inflation... but you have factors affecting each inestment/business differently - for property it is location can get worse or better for various reasons . .more afecting price , input materials go up more/or less than inflaton thereby affecting prices , price of land and scarcity , political situation , economic factors ,social factors , the list is as endless as for equity... I am sorry , but as much as I am trying to hear you out , your arguments are not convincing. There was a bubble with houses and with equity ( as was with gold when it went over USD1000). So again , where do you invest yourself ? As for buying in a future , yes , agree last year was not the best to buy property ( or equity ) , but trust me there will be another bubble - are you waiting until after that next bubble ? . .less by Gem on December 17 2008, 14:15 Find this comment inappropriate? Report it

Whats all this nonsense??? Jackie is just stating that perhaps in these times it may be wise to invest in something that you have control of. Given the Ponzi schemes and financial instruments that have failed its not a bad idea to consider. by brennan on December 17 2008, 23:40 Find this comment inappropriate? Report it

@ CJ CJ you say : "If your property 'investment' is going to incur huge losses in its early years then why not simply wait till the bad times are over before investing. There will be a time, some time in the future, when you can buy a property and not . .more make a huge loss in the first year. " Simple because you can buy at discounted prices today and thus is no need to wait. Secondly as a investment class you dont just buy one property its a on going process. Lastly you buy when the numbers make sense no matter where you are in the cycle. . .less by Brennan on December 17 2008, 23:43 Find this comment inappropriate? Report it

Thoughts (I) I'd urge you to read Shayne McGuire's book 'Buy Gold Now' (published way before the Sept 08 crash) that explains how totally dire the US economy is - he predicted a major recession and the collapse of the housing market, just as it came to pass - and what . .more a liability investing on Wall Street is, precisely because it's not properly regulated (hence mad men like Madoff). Right now, America borrows 6% more annually than it produces. As we speak, every single working American is responsible for $350 000 of national debt - never mind their own personal debt. The USA economy is totally bankrupt. That's right, bankrupt. . .less by Catherine on December 18 2008, 10:07 Find this comment inappropriate? Report it

Thoughts (II) The problem is that since World War II and the Bretton Woods agreement, global currencies were pegged to the value of gold, but in 1971 this changed and they were all pegged to the Dollar. This is why when Wall Street crashes we all take a big tumble ... . .more This is why our property market is not immune to the vagaries of the dollar. Sarkozy has said that in Jan 09, as soon as Obama is sworn in, the world's financial systems need radical re-structuring - basically, a new Bretton Woods. Until such time - and potentially beyond this given the huge US debt - gold is a good bet. Jackie Cameron, I therefore have to disagree. . .less by Catherine on December 18 2008, 10:07 Find this comment inappropriate? Report it

speculating or investing? if you in to make money in the short term (speculating) - buying to sell in a short period, i would not reccommend property. the costs, capital gains tax etc would eat into the profit. if you however buy to hold (investor) and apply the principles of . .more gearing it would beat any other investment over 20 to 30 years. ask donal trump, dolf de roos and robert kyosaki. the reason for it is that you use some of your own money (the shortfall between the rent receives and the bond payments) and your tennants money to invest over the long term for yourself. show me a property where 20 years later is was not worth much more than when you purchased it. . .less by frans on January 04 2009, 15:48 Find this comment inappropriate? Report it

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