Depending on one’s definition of “things”, the title of today’s article may or may not be true. I suspect most would agree that love, laughter, kindness and beauty are some of the best things in life and that they basically come without a price tag. However, once you cross over into the material realm, I think many would side with author Robert Heinlein who popularized the phrase “There ain’t no such thing as a free lunch.” (also known by the acronym TANSTAAFL). In spite of all the things which can be enjoyed without cost, Heinlein reminds us that bars which used to serve a free lunch to noontime patrons necessarily charged more for their drinks than bars that didn’t.

During the final quarter of 2008, we watched the end of the “free lunch” of limitless increases in home prices, the failure of the investment banks behind the complex mortgage-backed bond deals which enabled continued home purchases, the California public pension system booking losses in the billions of dollars and a large number of wealthy investors and charities losing many billions more through a Ponzi scheme allegedly perpetrated by Bernard Madoff.

While each of these situations was different, they share a common thread. You learned as a grade-schooler that if something seems too good to be true, it probably is or, as Heinlein would have said: TANSTAAFL. As adults, our education and sophistication sometimes overshadow our early understanding of how the world works. Any of us can be blinded to what’s happening right before our eyes.

As financial advisors, Warren Ward Associates regularly reviews investment alternatives on behalf of our clients. There are so many to choose from that our process consists of two parts. First we attempt to rule out those which appear inappropriate, then we try to select the best of those which remain. We begin by asking the question “Who is going to buy this when our clients are ready to sell?” This eliminates many of them because we try to be rigorous in applying the “no free lunch” concept. Did this approach help our clients in 2008? Well, we invested in no high-priced homes to flip, no investment banks, no California land deals and no “sure things” offered to a very exclusive group comprised of “friends of friends”.

Like Ken Lay did at Enron, it appears that Bernard Madoff simply lied to auditors and regulators, not to mention at least some employees and apparently all investors. A creative and well-documented lie can be very tempting, especially when used to support an “above market” investment return. The problem, of course, is that no investment strategy can really outperform the broad market year in and year out. While the hedging strategies that Madoff said were being employed can be used to protect a portfolio from downside risk, the huge volume of trades required in this case would have moved the markets all by themselves. As I write this article in early January, the Securities and Exchange Commission has confirmed that they received credible allegations of improprieties as far back as 1992 and failed to act decisively. Perhaps Madoff’s stature in the investment community (he was past chairman of the industry association NASDAQ), simply lifted him above suspicion. No doubt new rules will be forthcoming in hopes of really getting the barn door closed this time.

Although no one at WWA is participating in any sort of fraudulent scheme, our firm does have one thing in common with Madoff’s: most of our new clients are introduced to us by current ones. In the Madoff case, these “middlemen” were rewarded financially for their efforts. Our referrals, on the other hand, originate with current clients who simply believe that WWA can be of assistance to someone they know. Of course, we have a range of safeguards in place to ensure that our clients’ assets are protected. These are detailed in the documents we provide when beginning a new relationship. In addition, we are happy to answer questions regarding any aspect of our business dealings, something Bernard Madoff conspicuously declined to do.

Madoff’s investors thought they were being let in on a special deal. They were told they were being treated “like family”, when in reality they were being duped from beginning to end. Ponzi schemes like this one range from simple chain letters to one in the early 1880’s involving the son of former President U. S. Grant. The best available protection from fraud is the liberal application of the “smell test” to every opportunity which presents itself, keeping in mind what you learned in grade school.

With that thought, let me stop and welcome you to the new year. I certainly hope your holidays were enjoyable and that 2009 will be a great year for you and all those you love. WWA is honored to serve as an advisor to many of you and we are looking forward to a productive, if much less eventful year for us all.