Prison, Ponzis, and Profits
How to legally cash checks for years to come...
World-class swine Bernie Madoff died in prison yesterday at the tender age of 82.
I'll start by saying that I never take any pleasure in a man dying behind bars, regardless of what they've done. However, in Madoff's case, I sincerely doubt that anyone is shedding a tear for perhaps the biggest swindler in financial history. He was a man without a conscience who cost thousands of investors their entire life savings.
As British crooner Morrissey once sang, “He stole from the rich and the poor, and the not very rich and the very poor.”
Over the course of decades, Madoff funneled an unfathomable $50 billion into his investment securities business. He did this by operating the largest Ponzi scheme in world history. For those unfamiliar with Ponzi schemes, it's really quite simple: a trusted advisor lures new investors into the scheme with promises of massive returns, then uses the money from the new investors to pay profits to the older investors. Eventually the plot unravels once the huckster runs out of fresh blood to keep the racket going.
That is what finally happened with Bernie Madoff — but the damage had already been done. All told, 16,521 investors filed claims against Madoff before he was charged with eleven felony charges, including money laundering, false filings with the SEC, and fraud.
He was sentenced to 150 years in prison — which proved to be a life sentence.
What made Madoff's crimes all the more heinous was that he specialized in managing the investments of some of the world's largest charities. According to the Philanthropy News Digest, the “$1 billion Picower Foundation, the $240 million Betty and Norman F. Levy Foundation, and the $198 million Chais Family Foundation lost everything and closed their doors.”
Madoff also conned millionaires like Steven Spielberg, Holocaust survivor and Nobel Peace Prize winner Elie Wiesel, and former Disney Chairman Jeffrey Katzenberg.
But the victim I want to talk about today is still feeling the Madoff effect...
I'm talking about the New York Mets. The baseball team was owned at the time by the billionaire Wilpon family. After being introduced to Madoff's magical money machine, Fred Wilpon gave the green light to their general manager to begin restructuring the player's contracts to allow money to be deferred, which meant that instead of paying a player all of their salary during their tenure with the team, they would spread the payments out over a certain number of years.
That allowed the Mets to spend lavishly to “win now,” and worry about the millions of dollars later. It made sense at the time: if the Wilpons could count on Madoff's outsized returns, they could afford to kick the can down the road since they would be pulling in so much extra money.
The most famous — and costly — contract that was signed during this time was that of aging slugger Bobby Bonilla.
To say the deal didn't work out in the Mets' favor is a wild understatement. Bonilla barely made it onto the field, and when he did, the results weren't pretty. He was bad enough that the Mets agreed to buy out the last season of his contract for $5.9 million. That's a huge chunk of change for essentially getting fired.
But the real mistake the Mets made is how they decided to pay him. Instead of just giving Bonilla the millions in one fell swoop, they deferred his payments over the next few decades. The Mets agreed to pay him an annual paycheck of $1.19 million starting in 2011 and ending in 2035. They also threw in 8% interest for good measure.
So instead of just pulling off the band-aid, the Mets will end up shelling out $29.8 million. It will go down as one of the most bone-headed financial decisions in baseball history.
It's such a joke in the baseball world that every July 1 has been dubbed "Bobby Bonilla Day" — the day when he receives that million dollar check. New Mets owner and hedge fund titan Steven Cohen has even floated the idea of holding "Bobby Bonilla Day" at Mets stadium — even joking that he could bring Bonilla in and give him an oversized novelty check.
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But back to Madoff...
The Mets never would have made that deal if they weren't so accustomed to Madoff's fraudulent 10% plus returns. The lesson here is, if something sounds too good to be true, it probably is.
I like to invest in a similar way to Bonilla — I'd much rather continue to get regular checks like clockwork instead of landing one big payday.
I achieve the same thing with my dividend stocks. I personally own over a dozen dividend stocks in my personal brokerage account, with yields ranging from 1.5% to 6.8%. Since I am not currently relying on the income produced by those stocks, I typically enroll in the company's dividend reinvestment program — or DRIP.
That essentially means that I dump my dividend payouts back into the stock — growing more and more shares. It produces a compounding effect when the dividend yield is added to the principal, so that from that moment on, the interest begins to earn interest on itself.
Over time, that process can add up to a small fortune — even with very modest investments.
I like to refer to the “Rule of 72” which says that in order to find the number of years it takes to double your investment at a given rate, just divide the yield into 72. For example, if you are earning a 9% dividend on your investment, it only takes eight years to double your money... and roughly 13 years to triple it.
It's a simple strategy that has served me well. Once I actually need the payments for my day-to-day living in retirement, I'll be able to use my swollen dividend portfolio to collect checks almost every single month. While sadly they won't be million dollar checks like Bobby Bonilla's, they will be large enough to allow me to live a comfortable life for decades to come.
Now, it does take money to make money. If your dividend portfolio averages a 3% yield, you would need $1.5 million to pull in around $50,000 in annual income. However, there are ways to accelerate those returns.
He has shown his readers how to collect 100% passive income, and once you’re set up, you don’t need to do anything again. Just follow the simple steps he lays out in this video, and you can have your own Baby Bonilla day as soon as June 14.
And every 90 days thereafter....
It's easy, it's effective and best of all, unlike Madoff's scheme, it's entirely legal.
Jimmy is a managing editor for Outsider Club and the investment director of several personal finance advisories, The Crow's Nest, and The Adventure Capitalist For more on Jimmy, check out his editor's page.
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