Tom Petters (alleged) investment scheme is estimated to have cost his investors $3 billion in losses. Bernie Madoff’s $50 billion Ponzi scheme has just blown up over the past few weeks. The $50 billion Madoff losses are the largest fraud-related investor losses in history by a wide margin. What lessons can investors learn from these recent giant fraud schemes to protect themselves in the future so they aren’t duped as well?

1. If it sounds too good to be true, it probably isn’t true. Returns that are well above the market or that are amazingly consistent through any type of market demand lots of questions. Be skeptical. Petters was supposedly promising some investors big returns every 90 days. That is just not realistic and doesn’t make common sense. Why didn’t he just give investors a steady 12% return per year (or borrow at 6%-8%) and keep the rest for himself if it was such a great business/investment? Madoff supposedly produced equity returns that were amazingly consistent at +1% per month regardless of how much the stock market rose or fell during the month. Again that’s too good to be true.

2. Don’t chase returns. You are likely late if you are chasing great recent historical returns.

3. Risk is always highly correlated to returns. There is no free lunch. Be wary of guaranteed returns and/or promises of above market returns. If your manager is producing great above market returns, he is probably taking above average risk to get there. Be skeptical.

4. Wealthy people are often not any smarter or more ethical than regular people. Both of these investor frauds had lots of wealthy, smart people and companies as investors. Greed is a universal emotion that may even be stronger for wealthy people. The more you have, the more you want even more. Sometimes the rich are the “dumb money”.

5. Trust, but verify. Ronald Reagan said it best. Some people who did their homework on Petters and Madoff decided not to invest. Get verification from third parties, referrals, background checks, brokerage statements from an un-related custodial brokerage firm. Do your due diligence to check things out or have an advisor you trust do it for you.

6. Beware of conflicts of interest. Petters was paying his associates million dollar bonuses to keep them happy and going along with the scheme. Bernie Madoff had his sons working for him and his brother-in-law was his accountant. Madoff owned the investment firm and the brokerage firm that was doing all the trades so it was much easier to fudge the numbers. Is the financial incentive of your investment manager/advisor aligned with your interests? Always? Ask the question.

7. Make sure your investment manager is using a separate, independent, and well-known broker/dealer as the custodian for your assets. Make sure your assets are at a custodian firm who is independent of the investment manager. Is it a custodian firm you have heard of? Madoff owned and ran both and therefore there was no outside party to verify things. The fox was guarding the henhouse. Madoff’s client statements did not come from an independent custodian such as Fidelity, Schwab, or TD Ameritrade. They were from Bernard L. Madoff Investment Securities, LLC. Madoff himself controlled what the statements said. Did Petters even use a custodian? Make sure you get regular statements from the independent custodian investment firm, not just from your investment advisor.

8. Never write checks or send deposits directly to your investment advisor. They should be written to the investment advisor’s firm or preferably directly to the custodian firm that is holding the assets.

9. Diversify. Don’t put 100% of your investment in one hedge fund strategy like many Petters and Madoff investors did. They likely did this because they were getting such great returns (for a while) there. Now they are completely wiped out.

10. Watch your risk levels. Again many investors had most or all of their money invested with just one hedge fund strategy (Petters or Madoff). That is too risky for any investor.

11. Get your investment agreement in writing. It is smart to have an Investment Policy Statement (IPS) that outlines your investment strategy and parameters in writing. You should also have the investment agreement between you and the investment manager in writing.

12. Hedge funds can be risky. They are mostly unregulated, often secretive, expensive, and usually not transparent. You often don’t know how much risk they are really taking.

13. Don’t invest with a money-manager just because of their reputation. Check them out. Do some due diligence. Understand their strategies and make sure they make sense for you. Business success and social prominence doesn’t ensure safety or soundness in investments. They also don’t ensure the highest ethical standards.

14. Use common sense. Did it make sense that Petters could buy electronics from Sony and then sell it to Wal-Mart and make big returns? I don’t think so. Wal-Mart is a smart company with big buying power and smart purchasing agents. Petters was in some of the toughest businesses in the world (electronics, airlines, Polaroid) and was supposedly making huge money in them? Madoff made 1% each month in stocks when the market was down big or up. Does that make sense? How can he do that? Ask the questions.

15. Don’t invest in things you don’t understand. This is one of the best rules of investing. You should understand the structure of the firm you are working with, the investment philosophy, and the investment process. I’m sure most of Madoff’s investors had no idea what his “split strike conversion” equity strategy was. How many investments do you own that you don’t understand?

16. Avoid “secretive” and “unusual” investment strategies and managers. Demand transparency. Ask lots of questions. Read through your brokerage statements carefully to make sure you understand what is going on. Petters and Madoff were both secretive about how they were producing these great returns and discouraged investors from asking about their “proprietary” strategies. Madoff would toss investors out who asked too many questions.

The Petters/Madoff scandals are another reason for investors to lose confidence and trust in the financial markets. Most investment advisors and money managers are good and honest people.

Successful long term investment is not just about buying low and selling high.

Stock markets rise and fall, and share prices are vulnerable to everything from political news flow to the weather. Trying to find your way around - particularly during times of high volatility and uncertainty - can feel like negotiating a minefield.

So how can we make sense of such a confusing world? It is probably time to go back to basics - stock markets may rise and fall, but the rules of sensible investment remain constant.

Rule 1: Buy what’s right for you.

Just because an investment works well for somebody else does not mean it is right for you. Consider your own situation - your future liabilities, your investment goals and, most importantly, your appetite for risk - and then make your own decision.

Rule 2: Diversify.

Spread your risk by diversifying your portfolio across a mixture of asset classes, industry sectors and areas of the world. If you put all your money into a single asset class,sector or company, your portfolio is very exposed and performance is likely to be volatile - whereas, if you mix it up, when one asset is going down, chances are, another asset could be going up and will help compensate. Don’t put all your eggs in one basket.

Rule 3: Invest for the long term.

It’s hard work - and largely pointless - trying to time your investment so you buy right at the bottom and sell right at the top. Similarly, trying to make short term profits by turning over investments quickly will get expensive and carries a high risk. Instead, target your portfolio at quality companies or funds and then allow them the time and space they need to grow.

Rule 4: If an investment has risen substantially, take another look.

There is an old rule of thumb which says ‘when your investment doubles, sell half’. Short term sentiment in stock markets can drive values artificially high, in which case, you may want to cash in while you can. Don’t get greedy - you should never be ashamed to take a profit.

Rule 5: Never buy what you don’t understand.

History is littered with funds which promised a great deal but which, when faced with pressure from the market,collapsed with all those promises broken. Some shares or funds might sound very exciting and, indeed very simple,but if you don’t understand exactly what the company does or how the fund works, steer clear.

Rule 6: Know when to say goodbye.

If a holding has performed particularly badly relative to its peers, you need to consider cutting your losses and selling it altogether. It might be better to sell out and reinvest the proceeds into a quality alternative than to sit around hoping to recoup your loss.

Rule 7: Don’t get emotionally attached.

It’s wonderful if a holding has worked for you, but you don’t have to feel grateful: the share doesn’t know that you own it. You should look at every existing investment with the same clear headed objectivity as you did before you bought it - and when it’s time to sell, do so with a clear conscience.

Rule 8: Be your own person - don’t follow the herd.

Many investors became caught up by the euphoria which surrounded the dot-com boom of the late 1990s simply because everyone else was and they did not want to miss out. Consequently, they bought shares in companies that promised much and delivered little or nothing. It is hard to turn against the flow but always take a step back and think not just about what you are buying, but why.

Rule 9: Review your portfolio regularly.

Your portfolio has been set up to meet your objectives based on your needs today. However, over time, your needs and circumstances can change. The markets can also change - and your portfolio may need the odd tweak to make sure it keeps up. Review it regularly - perhaps every one to three years - and make sure it stays on track.

Rule 10: Don’t believe everything you read!

Headlines on TV and in the finance sections of newspapers can be just as misleading without investigation as they are in celebrity news and sport. Make sure you keep a clear head, remain focused on your objectives and take advice from a qualified professional to ensure you are making the most of your investment portfolio.

If you would like to take a closer look at your own circumstances and discuss the best mix of investments to meet your needs, speak to your professional financial adviser.

As an angel investor or venture capital investor, you are always looking for the next big investment. In our current environment, as always, there are many deals looking for seed capital.

Most of us who qualify as accredited investors or qualified investors know, that most of these venture investments will fail. How do you choose the next big angel investment?

Here are a few things to look for:

You want people who are totally dedicated to their business, not those who are trying to make a fast buck on the latest fad. If they have the company logo secretly tattooed on their arm, they are for you. If they say things like “If this tech thing doesn’t work, I can always go back to truck driving” then run! Your team must be willing to take those strong pains that are the growing pains of a small business.

Smart investors always avoid unfair deals. Let’s face it, in almost all startups seeking seed money, the proposition boils down to “With our brains and your money, what have we got to lose?” The investors should get a big enough piece of the company that if it wins, they win big, because most startups seeking see money will fail.

Granted, deals that favor the investor de-motivate the entrepreneurial team and are also to be avoided. The deal should also be structured to allow the investor to come in and pick up the pieces if the deal goes bad. Most investors won’t want to, and even if they do, there is likely to be nothing to salvage, but give them a prayer.

The company must offer a fair deal. I find that valuing companies seeking venture capital, particularly if they are startups, is very hard. Only hindsight can tell you what the value is. However, it is easy to see that you should get an expert to tell you what the investor expects.

Seed money investors are looking for character in management. There are several indicators of this. The first is a successful track record.

The next is that the handling of investor funds is transparent. If you cannot check the inventory, it isn’t there.

Another sign of character is a scrupulous adherence to the securities laws. Anyone who invests in a deal where the principals are ignorant of the regulations, are making unlawful sales of unregistered securities, and who are paying illegal finders’ fee and commissions to unlicensed securities “brokers” deserves everything they inevitably get. We know that the securities laws are almost impossible to understand and comply with, but there must be a scrupulous effort. Companies who do not bother to find expert securities help are probably not good investments.

As most startups fail, let’s take a look at why. Probably the largest cause of failure is management. While managers need a living wage so they do not have to worry about their own finances while building their company, managers who pay themselves lavish salaries and perks should be shot. Beware lavish spending of any kind. The watchword for a venture company is frugality. Only the cheapskates will survive the hammer and pound of the business world.

Next, although this could be called incompetent management, having a faulty business model is probably the next most serious cause of failure. Volumes can be written here, but the worst crime in this category is failing to do many customer surveys and make them thorough.

Sadly, the next cause of failure is fraudulent conduct. Some companies are formed only to provide the promoters with funds from the investors. They know the company won’t work. The worst of them lie to get the money. No matter how much due diligence you do, you may be up against professional scam artists who make a career of doing this. As this is their career, they are good at it. Or you may be lulled into a feeling of confidence by the stellar reputation of the promoters. It is at this point where the investor must be a suspicious swine. As guilty as he may feel about it, it is his only hope.

The last risk is not that of failure. The risk is that of dilution. The company succeeds but the business is soaking up much more cash than expected and the new stock that is sold dilutes your equity.

As all of us in this industry know, you will spend several times more than you expect and take twice as long as you expect to do anything.

As many venture investors will tell you, the way to really do due diligence is to invest and be inside the company for a year. Only then will an investor see what he has.

I believe that venture companies are our real hope for the future. They will fuel growth and competitiveness. I have a soft spot for the brave entrepreneur who wants to sacrifice his life for his goals. Let’s give him the resources he needs to succeed and do it fast. Then, a year or two from now, we can all look back on this as the start of a great deal for all concerned. That is what we all want, isn’t it?