"it will be because scores of people made outsize bets on his prowess without taking the time to fully understand what they were investing in."

Here's a post in the NY Times by Ron Lieber and Tara Siegel Bernard that counsels against Wishful Thinking:

"When wealthy investors are willing to hand over a sizable sum to a single money manager they heard about at the country club, certain first principles of investing bear repeating."

I worry about first principles when I invest five dollars.

"That manager, Bernard L. Madoff, is accused by the Securities and Exchange Commission of running a fraud scheme that may be the biggest in Wall Street history. But if it ends up in the record books, it will be because scores of people made outsize bets on his prowess without taking the time to fully understand what they were investing in."

Just please don't tell me that they didn't know that these investments were risky. That's not on.

"All investors, but especially those with a high net worth, need to maintain a healthy sense of humility about their level of ignorance. Alternative investments, whether they are hedge funds or venture capital or private equity, can be complicated. They contain unpredictable levels of risk. But all too often, people are willing to overlook those risks because, well, everyone else is doing it. Or they simply place too much trust in too few hands."

All of this falls into Wishful Thinking: These investors ignored reality. They knew that the investments were risky, but were willing to look the other way for higher returns. These investments can be complicated to understand, but their being inherently risky is not.

"Thankfully, outright fraud is pretty rare. It is not every day that a Wall Street legend like Mr. Madoff is arrested and accused of running a multibillion-dollar Ponzi scheme. And by the time something like that happens, it is too late for investors with their life savings caught in the mess to escape the impact."

Here's more Wishful Thinking, that will lead to some criminals avoiding detection. There's no way to know the exact level of Fraud a priori.

"But there are plenty of strategies you can employ to lessen that impact or, better yet, avoid getting ensnared in this kind of situation in the first place. Here are a few:"

Don't have more than a few, unless you plan to organize your whole life around them like religious practice.

"5 PERCENT Any investment has at least a remote possibility of going to zero or close to it. But when you are dealing with hedge funds and other exotic fare, the risks can be bigger, for reasons like leverage and strategy or lying and stealing.

That means that you should never put more money in than you can afford to lose. Say, 5 percent of your net worth, or better yet, 5 percent of your liquid net worth. Losing that will hurt, but it will not maim.

“We have always gone with 5 percent or less because if it is a total wipeout, someone can still sustain themselves with 95 percent of their capital intact,” said Ian Weinberg, president of Family Wealth and Pension Management in Woodbury, N.Y. "

Fine.

"HUMILITY Investing, in general, requires humility. Few people have enough of it. It is the reason so few people put most of their money in index funds, which track various asset classes rather than trying to pick the winners in each.

One problem with hedge funds is that they appeal to all the wrong instincts. They are for the privileged. Investors need to have a minimum net worth to qualify. In the case of the money managed by Mr. Madoff, many people seemed to have gotten in on it by belonging to the right country club.

“He was dealing with extremely wealthy individuals,” said Harold Evensky, president of Evensky & Katz, a financial planning firm in Coral Gables, Fla. “All too often, they make relatively easy marks because the pitch is, ‘You’re special, you can get something that other people can’t get.’ ”

But you are probably not special. Bill Gates is special, and he is the beneficiary of the best investment opportunities from the smartest people in the business. The Ford Foundation is special. The people who run Harvard and Stanford and Yale’s endowments are special.

You, however, are probably hearing about the second- or third- or fourth-tier ideas in the world of alternative investments. That does not mean the managers pitching them cannot make them work. But be honest with yourself: if you are in on them, how special could they really be, given the enormous demand for truly unique investment opportunities?"

This one is decidedly hard to get across. If you're rich, then you must know what you're doing. To me, it's largely luck.

"SMARTS You may be rich and you may be smart. But smart about this sort of investing? Not so much.

“I think a lot of millionaires, maybe they inherited a couple of million or they didn’t earn their money through any investment savvy,” said Milo M. Benningfield, a San Francisco financial planner. “A lot of those people have money and are extremely vulnerable, in part because they’re supposed to be smart because they have money. It’s a paradox.”

There is no shame in not understanding Mr. Madoff’s split strike conversion strategy. Admit your ignorance, question your investment adviser’s certainty and seek a plain English explanation of the opportunity that is in front of you. "

Lovely. It is a Paradox. You should definitely have a plain English and clear and truthful explanation of the investments and risk before investing in anything. It defies credulity that you have to tell people this.

"RESEARCH Doing your homework on a sophisticated investment opportunity is not always easy. Your financial planner or wealth manager may not have the time or the skills to do a thorough investigation, either.

On Thursday, a hedge fund research and advisory firm called Aksia L.L.C., sent a letter to clients reminding them of all of the red flags it had uncovered about Mr. Madoff’s operation long before his arrest. Aksia was not the only entity to sound the alarm, and its note has a bit of a chest-beating, self-congratulatory vibe to it.

Still, it is a great read. (It is linked to the version of this article at nytimes.com/yourmoney.) And it is a reminder that having some sort of expert on your team, or your investment firm’s team, is a pretty good idea.

If you are game, you may even accompany your designated experts as they visit the entity that is promoting the opportunity. “We encourage them to join us,” said Simon Fludgate, the head of operational due diligence at Aksia. “We were told explicitly that you cannot go to see Madoff.” The barring of such field trips was one of many bad signs."

He was like the Wizard of Oz.

"SECRETS One hard part about investing in hedge funds is that some of the most successful ones will not say much about how they work. If they disclose too much about their tactics, others will copy them and their investors will be hurt. (So will the managers’ take-home pay.)

Not all of them behave this way, though. “Most of them are willing to be very open with us,” said Thomas Ruggie, a certified financial planner in Tavares, Fla. “If they are not willing to be fairly open, that typically causes us to shy away from moving forward with that company. We have two hedge funds that send us quarterly audited reports on everything they’ve done.”

While Mr. Madoff’s supposed returns were fully available to all, investment advisers were less successful in understanding how he did what he did. “I knew that their returns were always good, but I knew that nobody could explain how they made their money,” said Mr. Weinberg. “In our attempts to look under the hood, it was impossible to ascertain what they were doing.”

That kind of secrecy may soon prove to be less of an issue, though. Given the billions of dollars that may have disappeared under Mr. Madoff’s watch, regulators are likely to take an interest in what went on behind the scenes — and make it easier for investors to find out for themselves in the future. "

This one's easy mate. They didn't make money. Game over.

Again, Wishful Thinking is necessary for Fraud. There will generally be many warning signs that are ignored and avoided, as if investigating them would lead to jinxing the investments.