One of our favorite books is "
The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know" by Michael Edesess.
Since his book was published, we have gotten to know Michael Edesess and were thrilled to have him stop in St. Louis yesterday to visit with us. We need more financial industry insiders like Michael out there exposing the deceptive tactics the industry uses to take investors' money.
What's the net effect of these deceptive tactics?
Mr. Edesess claims "What has not been widely accepted yet as an established statistical fact is that professional investment services companies do not increase the growth of their clients' wealth but decrease it."
This is an important message that is starting to spread across the world. Here is a
review of the book in the Shanghai Daily, China's largest English daily . . .
A financial advisor confesses: It's all a bunch of lies and hype
Created: 2007-12-1
Author:Wan Lixin
MICHAEL Edesess' book is a warning to all investors, and it is particularly timely for small Chinese investors.
With our historic bull market turning into a rollercoasting dip, some have just awakened to the fact that the unprecedented bull run affords no more than another occasion for wealth redistribution.
In "The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know," Edesess takes an insider's look at the tricks investment managers employ in separating investors from their money. Edesess, who was once a founding partner and chief economist of a financial group, knows what he speaks of.
In a recent television interview, former Morgan Stanley star economist Andy Xie was asked to comment on his success as a wealth manager after being forced to resign due to the leak of a sensitive e-mail from him
"You know, idiots are making money these days," Xie said, beaming inscrutably, clearly unwilling to make much of his accomplishments.
Edesess would have corrected Xie by pointing out that only money managers make money, at the expense of their clients.
Coming as it were from a founder of a financial business, the book is not unlike a confession. The author admits that on numerous occasions he had witnessed how sales people lied to and deceived investors.
Chinese fund managers are fond of talking of common sense and discipline as a sure way to riches.
The legend is told of an elderly woman working at a parking lot for bicycles in front of a brokerage.
Wherever she found there were too few bikes for her to attend to, she began to buy stocks. And whenever she found the parking lot crowded, she dumped her holdings and returned to her old business.
Her homespun wisdom served her so well that after a few years - well, you know how the story ends.
Similarly Edesess' book tells of the US "Beardstown Ladies," a group of senior citizens who formed an investment club in the 1980s, and achieved fabulous success by exercising old-fashioned, American-heartland frugality and investing according to their commonsensical principles.
They were catapulted into national fame after alleging that they had achieved an average annual return of 23.4 percent over the course of the preceding 10 years, about 8.5 percent more than the return on Standard & Poor's 500 Index.
They were wrong.
"Compared with the Beardstown Ladies, whose fraudulent practice was unintended, the fraud of the investment advice industry is studied, refined, Wall Street minted and Madison Avenue packaged," Edesess observes.
The money managers have to lie because this is the only way to persuade their clients to part with their money.
As the author says, while it is not unusual for any money manager to beat the market over a period of time, it is rare for any money manager, professional or amateur, to beat the market consistently.
Thus, the managers' frequently used trick is to attract their clients by lying - trumpeting and exaggerating any winning performance.
This is very similar to the strategy adopted by the lottery agencies in China.
On Thursday, Shanghai Morning Post devoted a whole page to an unknown lucky buyer in Gansu Province who had won 113 million yuan (US$15 million). The lottery authority regularly publicizes winners.
Interestingly, on the same day the Oriental Morning Post gave prominent coverage to an unlucky buyer in Shanghai who had cheated relatives and friends 16 million yuan to buy lottery tickets.
How many frauds and thefts have been triggered by reports of a stroke of good luck?
Money managers are familiar with this selective disclosure of information, because their only aim is to enrich themselves.
"What has not been widely accepted yet as an established statistical fact is that professional investment services companies do not increase the growth of their clients' wealth but decrease it," Edesess claims.
Disciples of scientism
The brokers enrich themselves by charging high brokerage fees, and they have shown great originality in devising other means of robbing investors, for instance through the so-called "loads" and the "wrap fees."
But the author claims none of the charges compares to the hedge fund charges, which can be more than double the returns to an investor.
"Hedge fund management is not just a license to steal; it is a license to steal literally billions," the book says.
So the real challenge for money managers is, rather than pondering on the impossibility of constructing a portfolio that beats the market, to devise the means to lure clients in.
"The investment services business is first and foremost a sales business. It focuses the largest part of its effort on determining what sales pitch the customer will buy," Edesess observes.
Philosopher Friedrich von Hayek called the misguided application of natural science "scientism," and market prognosticators and analysts are all disciples of scientism.
The seemingly scientific techniques and presentations are a sheen, clearly useless in dealing with the market that moves randomly, where past performance will never be a reliable gauge of future performance.
But market analysts seem to have a handy answer for everything.
For instance, when property shares experienced sudden falls this Wednesday, all the analysts knew why.
One identified the new policy on affordable housing as the culprit. The second blamed the rumored collection of property taxes. The third said it was but a technical correction in the run-up to a big rally.
PetroChina share prices have shed over 2000 billion yuan in its market value in a week of steady decline, trapping over one million of small investors.
In one sense the market analysts are also victims, as they have to drastically and steadily lower their former valuation of the share.
As the author claims, investment firms prosper by downplaying the known facts. Their sales representatives often interpret their research findings in a way that suit their purposes. They look respectable, earnest, well-informed, and like to speak in an impenetrable language spiced with technical jargon.
But investors often conspire in their own downfall, as their greed blinds them to the inherent risks of entrusting their money to others.
They should be reminded that whenever they put money in a fund, they do so at "agency risk," which stems from the inherent conflict of interests between the principal and the agent.
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Copyright © 2001-2007 Shanghai Daily Publishing House
