Author Michael Edesess is a mathematician who was a founding partner and chief economist of the Lockwood Financial Group until its sale for $200 million to the Bank of New York in 2002. His book, containing insider knowledge of the investment industry "shines a spotlight on the true cost of the industry's useless advice."
(Author just out of college with a PH.D. in mathematics) "I'm smart; surely I can figure out how to beat the market. Little was I to know how many people I would meet over the years with the same idea, all of whom would be wrong"
"The average stock portfolio in our database (the largest database of tax-exempt investment funds in the world) did not outperform a naive strategy of buying the whole market."
"I quickly realized that the whole industry was about what would sell, and not about what was true or factually based."
"I tested the data to see whether professional managers could beat the market consistently and predictably; and once again the answer was that they could not."
"The investment advice and management industry is enormous, with total revenues well over $200 billion per year in the United States alone. A percentage of investors' assets provides the entire financial support for this industry."
"Investment advisors may speak of 'dollar-cost-averaging' and, perhaps, 'regression toward the mean,' efficient frontier,' 'mean-variance analysis,' and Nobel Prize-winning technology---all with the predictable effect of snowing the client and helping to spread the Big Investment Lie."
"The lure of getting rich quick, of finding the Holy Grail, can make the client a willing partner in assisted self-delusion."
"Be supremely suspicious of investment advisors who imply they will beat the market or who do not fully reveal, in every minute and cumulative detail, what their services cost."
"The smartest investment strategy is so simple and so direct that you can easily do it yourself."
"Most things about investments are unpredictable, but fees are highly predictable."
"Financial planners can be almost anyone--even astrologers, or just someone who hangs out a shingle."
"Hedge fund management is not just a license to steal; it is a license to steal literally billions."
"The term hedge funds is now applied to all funds that avoid oversight by regulatory authorities because they are not offered to the general public."
"The statistics on hedge fund performance cited in business and financial publications are highly inaccurate."
"Most of the hedge fund that were launched are now defunct."
"In 2004--the average cash take-home pay for each of the top 25 hedge fund managers was $251 million.--It comes straight out of the investors' accounts."
"People are vain, especially many wealthy people. Appearing to be a high-roller can be more important than actually making money."
"Government and government regulatory bodies cannot wholly protect customers from themselves."
"Many important voices in the aceademic financial field do clearly speak the truth. Notably, among others, is distinguished Princeton professor Burton Malkiel, author of the best-selling book A Random Walk Down Wall Street."
"If the investments are in a taxable account, then tax avoidance should be the first and foremost consideration of an investment manager."
"The vast majority of investment managers do not give taxes a thought."
"If you can pay a tax later instead of now, it's like getting a zero interest loan. That's a very valuable thing to have."
"The best long-run strategy for tax avoidance is the simplest: buy and hold."
"The Big Investment Lie is that you can beat the market by a whole lot if you're smart and well paid."
"What do the former Soviet Union and active investment managers have in common? Both believe prices can be determined independently of the market."
"One of the reasons investors seek out investment advice is because of the bewildering array of investment options."
"If you had invested at the beginning of 2000 in the top ten performing mutual funds for the previous three years, in the next three years you would have lost 70% of your investment."
"Any patterns and trends that may, for a time, appear to have persisted in the past, either do not continue or are not strong enough for an investor to exploit them advantageously after paying normal costs."
"When survivorship bias is corrected for, studies of mutual fund data invariably reach the same finding: the average mutual fund, adjusted for risk, does not outperform the market average."
"Such a large volume of price data is available that it has been possible to test the random walk model over and over again. It has held up in the tests like a champ."
"Everybody who is touting a new investment strategy performs backtests to show that the strategy would have worked in the past.--All you've got to do is try hundreds or even thousands of variations of your strategy until you get one that backtests well. It's all done by fast computer so it's easy. Therefore, a successful backtest is meaningless."
"The statistics are crystal clear: market-beating performance has no holding power."
"In 1974 John Bogle founded the Vanguard Corporation with a not-for-profit structure, dedicating it to the principle that costs should be kept as low as possible, and launched Vanguard's S&P 500 index fund."
"An index fund has three all-important advantages: it offers the investor the theoretical maximum expected return for its level of risk; it charges the lowest fees; and because of its low turnover, it keeps commissions to a minimum as well as taxes when investments are in a taxable account."
"For each percent of expected return you get above the risk-free rate, you'll have to pay a proportionate amount in increased risk. There's no 'free lunch.'"
"How much risk to take in order to increase your chance of reward is one of those existential decisions in life that we wish someone could tell us how to make--but it's up to us, ourselves, alone, to decide."
"If you're investing for five years or less, or think you'll panic and sell whenever your portfolio goes down, you should probably just forget equities."
"The investment field engage in astounding monologues of what I call 'technical word salad,' spiraling and self-elaborating fantasies piling technical words and statistics on top of more technical words an statistics, frequently making no sense at all--but the layman doesn't know that."
"The Big Investment Lie: 'We know how to make money in investment and you don't.'"
"Investors are alarmingly prone to self-delusion, and most investment advisors and managers are only too happy to take advantage of that fact."
"The financial writer Jane Bryant Quinn has labeled trash investment advice books 'investment porn.'"
"People want to get rich quickly. They want to beat the stock market. So just to give their neuron hope, they blow it by paying huge amounts to investment advisors and managers who will give them hope."
"Random luck is interpreted as innate skill."
"The investment advice and management business tucks away costs so they become almost invisible."
"The only things that can be predicted are fees and taxes. Fees and taxes can be very, very large; they can be predicted; and they can be reduced enormously by anyone who merely tries."
"There are good and cogent reasons why it should not be worth paying much, if anything, to try to beat the stock market."
"Stop searching for the Holy Grail. Give up the quest to beat the market."
"Stop believing that past investment performance predicts future performance."
"You can pay only the bare minimum by investing in the lowest cost, most widely diversified investment vehicle, such as index funds which are, in fact, the most 'sophisticated' investments you can get."
"Don't pay anyone to pick stocks for you. There's no reward for the cost and risk."
"You must choose the risk (stock/bond ratio) you are comfortable with--no one can do it for you."
"Keep fees and taxes as low as possible. They can swamp your investment returns."
"Equal weighted 'index' funds have to be frequently re-weighted incurring significant taxes and commissions in the process."
"There's no reason to buy several index funds to represent different segments of the market when you can simply buy the broadest market index fund that already includes all of these segments.
"It is my hope that this book will make a substantial contribution to a massive information campaign that will finally debunk--once and for all--the grand lie that is being told to customers of investment advice and management services, often with the customers' willing, even exuberant cooperation."
Thank you Michael Edesess.
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