Everything You’ve Heard About Investing is Wrong

In The Big Investment Lie, Michael Edesess explains how “the investment industry is selling snake oil- no professional advisor has ever consistently beat market averages.”

But if I’m not going to hand my money over to a professional, what’s my alternative? His upcoming new book, The Three Simple Rules of Investing, (co-authored by and Professor Tsui L.K and investment advisors Carol Fabbri & George Peacock) has the answers.

Investing is like Roulette, not like Chess

Financial advisors pretend that investing is a game of skill, like chess, but in truth, it’s much more like roulette: a game of chance. Wall Street makes a lot of its money by hyping the value of its complex mathematical models- which are in reality of little use at all.

Distrust the Misuse of Nobel Prize-Winning Mathematical Technology

For example, many well-known investment companies use the Markowitz Model, which was developed by a Nobel Prize-winning economist. But to use the model for just 10 classes of assets, you need to assume 65 different numbers. Where do you get these numbers? You can use data from the past, but that often leads to crazy results. (You can see why assuming the future will be just like the past is very problematic.)

So basically the financial advisors and firms play around with plugging different made-up numbers into the Markowitz Model, until the model says something they like, something the investors will believe. They do a bunch of complicated math to conceal the fact that they are basically guessing.

The Complexity is Made Up To Disguise the Uncertainty

The authors’ hope for their new book, is that people who are stressing over the complexity of investing, will realize they can discard all that complexity and still win. There’s one prudent thing you can and should do: invest in the whole market. That way you’re just betting that somewhere in the world, economies will continue to grow- a fairly safe bet.

If you spend a lot of time trying to do complex analysis- whether you’re paying someone else to do that, or doing it yourself- you’ve lost the value of your time. And when you consider the sheer amounts of luck involved, you rarely earn back the money that can pay you for that loss of time.

The Lies They Tell About Socially Responsible Investing

In college, I was part of a student club that urged the university to practice Socially Responsible Investing (SRI) and shareholder activism with their endowment. (To learn more about the many branches of this group nationwide, visit the Responsible Endowments Coalition website).

Our college administration was fine with writing shareholder activism letters, but refused to let our student ideals influence which stocks they owned. “We simply can’t allow the college to lose money,” was their argument. I was always curious whether it was true that SRI loses you money, so I asked the expert authors of our investment book.

Picking out which investments are socially responsible does take some time and effort, they told me. So you’re paying a fee to cover that time and effort. But when it comes to return on investment, socially responsible investments are NOT more likely to lose you money. The stock market is characterized by price efficiency- that means prices already do a great job of taking into account all available information.

People who pick which stocks to invest in (who claim to have insight beyond what is provided by the price) are basically just guessing. Picking stocks based on ethics is no better or worse than picking stocks based on guessing.

A Practical Guide for Moving Forward

Make sure you purchase The Three Simple Rules of Investing as soon as it becomes available. Whether you’re a financial professional or a first-time investor, you can still benefit from what an author called, “An inoculation against Wall Street lies.” They’ll be blogging about this on http://3rulesofinvesting.com so we can continue to be vaccinated against the financial chicanery which tries to trick us every day (and ultimately, weakens the stability of our economy with its tomfoolery).