A Look at Madoff's Real Numbers

Wednesday, 7 Jan 2009 | 12:20 PM ET

We've heard endlessly that even though Bernie Madoff allegedly turned out to be more of a con man than a money man, the strategy he claimed to be using to invest his clients' money would have been a good one if he was in fact using it. That's simply not true.

On Monday night's show, Jim explained how the returns from Madoff's split-strike conversion strategy would actually have been pretty awful over the last eight years. From 2000 to October of 2008, if you had roughly followed the strategy Madoff told the SEC and his clients he was using, you would've lost about 2.66% of your money.

In case anyone wanted more detail, here are what the approximate returns would have been from an options strategy like the one Madoff claimed to use for every year since 2001. Bear in mind that these are rough estimates from an attempt to duplicate the strategy Madoff said he used, so there's some wiggle-room with these figures. An astute trader could have done better than the returns below, and a bad one could have done worse. Think of these as a baseline for the returns you'd expect from someone using Madoff's stated strategy.

  • In 2001, his strategy would have produced a 12% loss.
  • In 2002, his strategy would have produced an 8.9% loss.
  • In 2003, his strategy would have produced a 7.3% gain.
  • In 2004, his strategy would have produced an 8.2% gain.
  • In 2005, his strategy would have produced a 6.7% gain.
  • In 2006, his strategy would have produced an 11% gain.
  • In 2007, his strategy would have produced a 12.2% gain
  • And in the first three quarters of 2008, the Madoff strategy would have produced a 21.1% loss.

These figures are pretty absurd when you consider that Madoff was claiming returns of about 10% to 12% a year, and never an annual loss. So, as Jim said, if the SEC had actually tried to reconstruct his strategy, instead of comparing what he told them with what he told his clients, which they did do, they might have noticed something was off with the numbers.

Then again, I get the impression that this just isn't something the SEC does. I don't think it makes sense for the SEC to try and do something like this to verify the claims of every registered investment advisor in America. That would be far, far too labor intensive. But given that they received a complaint stating that Madoff was running a Ponzi scheme, and the fact that they investigated him eight times in 16 years, they probably should have done something along these lines.

Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.

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