Protect Yourself in Post-Madoff Investing World

There is a certain fascination in watching the growing list of sophisticated investors who were taken in by the alleged $50 billion investment fraud perpetrated by Bernie Madoff. It's the kind of weird emotion that makes people stop to gape at the scene of a traffic accident, or follow a fire engine.

The names of those scammed range from Steven Spielberg and Jeffrey Katzenberg of Hollywood fame, to some of the world's largest banks like HSBC (HBC) and Banco Santander (STD). And it also includes hundreds of retirees and many charitable foundations as well as the country-club set in Palm Beach and New York.

How could so many wealthy, sophisticated investors (and investment advisers) have missed the now-apparent red flags? And, more importantly, if they could fall victim, how can you, the ordinary investor, make sure you don't get involved in a scam?

The answer is, in short: If something is too good to be true, it can't be true

You've heard that saying many times. In fact, many of you write to me asking about various propositions, ranging from investment proposals to debt-reduction programs, and all sorts of "get rich faster" schemes. The very fact that you have doubts in your mind is the first tipoff.

Photo Gallery: Reported Losers in Madoff Scandal

In the case of Madoff, the investment returns he reported weren't so outrageous as to trigger inquiry -- just a small percentage every month. But that consistency, in itself, should have been a warning. Even Madoff's proclaimed strategy of option-writing doesn't give that consistent a result. And now it's been revealed that, given the size of his investment funds, it would have been impossible to execute all those options trades in a relatively limited marketplace.