Due dilligence was only a partial recommendation, however. The primary protection is proper asset allocation. All of these problems would be avoided if common people stopped trying to make tremendous gains on specific companies. Why create billions in new goverment, hamper these industries, drive jobs overseas, etc. when you could warn investors to stop being so stupid and placing half their retirement in Enron?
Proper asset allocation doesn’t solve the problem. In fact, it is a significant problem in public markets and worsens fraud.
Think about the alternatives: instead of having a thief steal large amounts from a limited number of people, all of whom are very interested in getting a piece of his hide, increased diversification (i.e., proper asset allocation) just means that the thief steals smaller amounts from a larger number of people. None of this large group really has any incentive to go after the thief, because the individual cost to them is so minimal.
Put another way, if you want to steal a million dollars, it is a heck of a lot easier to steal a dime from one billion people than to steal $500,000 from two.
