The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know

by Michael Edesess

Book Overview

An insider's account of how consumers are scammed by the investment advice industry, and how to avoid throwing your money away.

The investment advice and management industry is built on fraud: the idea that professional advisors can predictably and consistently help you get a better rate of return on your investments. The industry sells us on this lie using manipulative tactics that are studied, refined, Wall Street-minted, Madison Avenue-packaged--and...

• Format: Hardcover
• Language: English
• ISBN: 1576754073
• ISBN13: 9781576754078
• Release Date: January 2007
• Publisher: Berrett-Koehler Publishers
• Length: 312 Pages
• Weight: 1.35 lbs.
• Dimensions: 1.1" x 6.5" x 9.4"

Customer Reviews

High Management Fees Add Up

"The Big Investment Lie: What Your Financial Advisor Doesn't Want You To Know" by Michael Edesess makes a compelling argument that the financial services and investment advice industry is worse than useless to investors. Edesess argues that professional money managers, mutual fund managers, and hedge fund managers add absolutely no value to low-cost index funds, which mimic the broader stock market. Edesess points out most mutual funds (and most hedge funds) underperform the broader stock market. Further, he argues there is absolutely no predictability as to which fund will outperform the market--whether or not any particular fund continues to do well is based upon luck. We can't select a good fund simply by looking at its record of past performance. A fund that performed solidly in the past might well bomb in the future. According to Edesess, trying to predict future performance based upon past performance is a key part of the big investment lie. Mutual fund and hedge fund companies start several funds. By chance alone, some manage to beat the market for a few years. Then, those funds that did well are promoted heavily, pulling in billions of dollars in investments. Edesess writes: "lying with statistics in the mutual fund industry is largely confined to the basic Fumarian lie--advertising statistical flukes as if they were trends that could be expected to continue." To demonstrate his point, Edesess creates the imaginary community of Fumaria, a cigarette-focused community of many thousand cigarette brands. Cigarette companies in Fumaria have learned to market their cigarettes as cancer preventatives. By searching through all their brands, a company is able to find some brands where the average life expectancy of smokers of the brand exceed the life expectancy of non-smokers (a statistical fluke). Ergo, smoking that particular brand wards off cancer. That brand is promoted as the healthful alternative to not smoking. In the analogy, not smoking is equivalent to minimizing management fees by investing in a low-cost index fund. Mutual funds that don't do well are closed or merged into new funds. All this is an attempt by the industry to conceal the true return to investors and perpetuate the big investment lie. What about the few investors who are known for beating the market? The paragons of investment achievement like Peter Lynch and Warren Buffett? Was it skill, or was it luck? Edesess addresses this point in detail. With Peter Lynch, Edesess says his reputation was largely created by great returns between 1977 and 1983--only a few years. Then, between 1984 to 1990, the fund just kept pace with the broader market. It's not possible to rule out that his success wasn't just a fluke. His success certainly was used to promote his fund. With Buffett, his record of achievement is much longer, and therefore, less likely to be pure fluke. But, discussing issues of risk and leverage, Edesess shows that even Buffett's performance wasn't predictable

finalcial services industry critical thinking 101

The Publishers Weekly review above is completely off the mark. Mr. Edessess offers balanced portraits of Buffett and shows the true record of Fidelity Magellan. His debunking of hedge funds is both homorous and informative.I think his point that many people are wedded to their "will to believe" is quite accurate. As he points out, 80% (or threabouts) of funds charge large fees yet underperform their index. Recommended reading.

This Is Not The Ranting Of Someone Who Is Ignorant Of What Is Going On In The Invesment World.

Economist and mathematician Michael Edesess author of The Big Investment Lie: What your financial advisor doesn't want you to know lambastes investment advisors and money managers and says that they are profiting from a big lie-promising that they can beat the market and do better than you can in investing your hard earned money. This is not the ranting of someone who is ignorant of what is going on in the investment world. Edesess is a highly educated and respected economist who currently chairs the board of directors at International Development Enterprises USA. Over the years he has worked as an independent consultant to institutional investors, and he was the founding partner and chief economist of the Lockwood Financial Group until it was sold for $200 million to The Bank of New York. His areas of expertise cover the range of applications of mathematics to investments, including performance and risk measurement. In other words, he is a serious thinker whose arguments merit attention, although they will probably result in many infuriating responses from the individuals and companies he criticizes. Edesess main arguments can be summed up as follows: investment advisors and investment manages don't have a crystal ball and they cannot predict the future. Furthermore, they do not give you good value for your money as the benefits they provide are not worth their cost. On average they don't earn more money for you than you could probably earn on your own without their "expertise." And they certainly don't know how to beat the market no matter what technology and research they may have available at their finger tips. Most of the hype that is proliferated is based on a Big Lie that only serves to fill the pockets of these individuals with their high fees. In fact, as Edesess points out, many investors don't even realize that they are using high-cost services that typically cost 2 to 3 percent of an investor's assets annually. The arguments used by these investment managers and advisors is that people want professional advice and they feel more assured when they receive it. However, as Edesess states: "But the business would be gradually reduced to a much small, much less lucrative business if it made a practice of telling the whole truth and advising clients accordingly." Consequently, it is obliged as an entire industry to engage in the Big Lie in order to keep its business lucrative-underplaying its fees and overstating benefits in any way that are legally permissible. Edesess harsh critique is divided into three parts where he shows how much you pay, how little you derive and the way it is sold to you. He asks the question-why do we continually give Golden Crumbs to rich people and then goes onto explain why for the most part the advice we are paying for does not increase your wealth. Concrete examples as well as personal anecdotes are provided to support Edesess's argument that professional investment managers should not be expected to

FLEECE AVOIDANCE

Humans have evolved through The Era Of Tooth And Fang, and the Era Of The Sword. Now they are in the Era Of The Con. The purpose of the Con is to separate the gullible from their freedom, their money, their reason, and sometimes, their lives, for the benefit of the selfish and ambitious. In the United States, the Con in promulgated by four major social institutions: Politics, Religion, The Media and Wall Street/Corporations. The Big Investment Lie tells the gullible how and why they are being fleeced by Wall Street. It is probably a futile effort but it is an intelligent and courageous effort nonetheless. Applying sophisticated mathematical principles and an insider's working knowledge of the "Street," Dr. Edesess dissects with surgical precision the ever-shifting deceptions, techniques and psychological ploys used by professional investment advisors to mask their exorbitant fees, exaggerate their mediocre performance and perfect their sales misdirections. He also lays out with clarity "Ten New Commandments For Smart Investing" that will help the average investor harness the immutable power of mathematics to boost his portfolio over time without anxiety. I wish Dr. Edesess had written this book and I had read it at the start of my earning career. P. & M. Weinstock

A big wake up call

The Big Investment Lie illuminates in interesting and entertaining ways the scary reality in America that tens of millions of individual investors, to their own enormous detriment, blindly and naively put huge sums of money into the hands of financial professionals who not only cannot consistently beat the market average, but also certainly rarely by enough margin to cover their fees. Edesess, a mathematician who seems to have a knack for relating economic, financial, and business concepts through everyday stories and simple mathematical explanations, raises a red flag very high to warn readers that they should look more carefully at what fees they are paying for the returns they are getting. He shows how fees that may look small but are actually high can have a huge impact on capital appreciation and easily cost average investors tens of thousands of dollars, if not hundreds of thousands of dollars, over a lifetime of saving and investing. Although his thinking about such topics as low cost index fund investing seems to be much in the same vein as Vanguard founder John Bogle and other low fee gurus and is therefore not necessarily original, the fact that so many millions of individual investors are still duped into chasing, at considerable cost, the higher returns fantasy that is cleverly dangled in front of them by the Wall Street marketing machine means that the message clearly still has not gotten through! Edesess's points, conveyed both through anecdote and analysis, are highly relevant and important because if taken to heart, they could probably save the individual investor community in the US billions of dollars. Wall Street might not like people to read wake up calls like The Big Investment Lie or another one in 2006 called Wall Street Versus America, but individual investors would be extremely well served to do so.