There's a Big Difference Between Reality and Perception
Napoleon Bonaparte is quoted to have said there is only one step from the sublime to the ridiculous. In a lesser but similar way, I have frequently encountered people who did not realize the moment they would have made abnormal profits on the stock exchange. Worse of all, they later made wrong decisions which ensured they made abnormal losses. Let me explain.
To the financially literate, what I am about to say appears so obvious that it may seem unnecessary and a waste of time and space. Yet millions of people worldwide, through their actions, continue to prove their ignorance and consequently suffer financially when they trade in stocks and stock derivatives.
REALITY FACT 1: You make money on the stock exchange when you sell for more than you bought.
REALITY FACT 2: You make money on the stock exchange when you buy for less than you sold for.
Below are 2 examples of mistaken perception.
MISTAKEN PERCEPTION 1:
Investor buys 1,000 shares at $20 each for a total of $20,000. One year later, the stock price is $45. Mistaken investor calls his friend for a cook-out to celebrate $25,000 he has made on the stock exchange (1,000 shares @ 45 = 45,000 less $20,000 = $25,000).
Two years since the mistaken investor bought the shares, he realizes the share price has dropped to $15. He becomes angry and tells himself he has lost $30,000 ($45,000 less $15,000). In a fit of anger he calls his broker and sells the shares at $15 each for a total of $15,000.
REALITY CHECK 1: The mistaken investor never at any time made $25,000. The only way he could have made the $25,000 was by SELLING the shares at $45 - which he did not do. Therefore, there was no reason for a celebration cook out.
REALITY CHECK 2: The mistaken investor made a loss of $5,000, not $30,000. ($15,000 less $20,000= $5,000 loss) Therefore his anger was unnecessarily 6 times worse.
REALITY CHECK 3: If he had not sold the shares at $15 each and instead held on to them, he would NOT HAVE MADE A LOSS. Profits and losses are only made when shares are bought and sold.
How Would You Protect Yourself With This Knowledge?
If you understand that money is made or lost when and only when a real transaction takes place, you can protect yourself from Madoff-Stanford like financial scams.
When you get a statement from your Madoff-Stanford afiliated broker with unusually high returns, it is very tempting to say, "let all the money stay there so that I can continue to receive long account statements with big figures". Today you know better. You will constantly sell off the shares that reflect the significant increase in value and keep the profits in real money - in your hands.
Therefore, for as long as the scam exists you will continuously profit and hopefully re-coup your initial investment. When the scam begins to fall apart, you will be among the first to know because you will start to receive long explanations instead of real hard cash in your hands.
At this juncture you need to do two things immediately. Request in writing an immediate withdrawal of 100% of your funds from all your investment accounts. If you do not get 100% of your funds, contact law enforcement agencies for direction on the next steps.
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