E-mail a friendMichael Edesess
original airdate January 23, 2007
Dr. Michael Edesess is an economist and mathematician with experience in the investment, energy and environment fields. He's written on those issues for numerous publications. Edesess was previously an independent consultant to several of the largest investment banking and consulting firms. He's also board chair of the nonprofit corporation, International Development Enterprises – US. His book, The Big Investment Lie, is an insider's look at the underside of the financial advisory industry.
Michael Edesess
Tavis: We continue our “Road to Wealth” series tonight with Michael Edesess. The former founding partner at the Lockwood Financial Group now chairs the board of directors at International Development Enterprises, USA, a nonprofit that focuses on business development in countries struggling with poverty. His new book is called “The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know.” He joins us tonight from Denver. Michael, nice to have you on the program.
Michael Edesess: Thank you, it's a pleasure to be here.
Tavis: Let me go back to that opening line that I shared at the top of the show, courtesy of you. It was not a Tavis original. That most investment advisors can't pick any better than a gaggle of monkeys. That's strong language, Michael Edesess.
Edesess: Well, one of the advantages I had being in the investment field for so long was that I worked for a brokerage firm, and then I developed a computer system that measured investment performance. And I had access to a very large quantity of proprietary data on the investment performance of professional investment managers.
I was able to do research on the data to see whether professional investors were able to do better than, let's say, the fleet of New York taxicab drivers. And as a matter of fact, and this only confirms a lot of research that was done in the academic community over the years, I found that on average, the professional investment managers do no better than naïve investors. And even the best of professional money managers do no better than the best of naïve investors, who might be doing very well just because of sheer luck.
Tavis: All right, so if you're right about that, and you're the expert here, not met, so let's assume for the moment (laugh) that you are, why then is this a billion dollar industry? Professional investment managers, that is?
Edesess: Well, that's why I call it “The Big Investment Lie.” It's a lie that many people buy into. They believe that because it's an industry of very wealthy people, well-educated people, that they must be doing something that is very smart and can help you. When I first got into the industry, I was really appalled by the sales pitches.
They involved a lot of deceptions, and what was particularly difficult for me, being a mathematician, was distortions of mathematics. But you kind of acquire what I call the aerial bomber mentality. I did not usually work directly with the clients, so the clients were, for me, mostly anonymous and distant. But then, some of my friends and associates, smart people, started talking to me about how they were going to an investment advisor, or an investment advisor was trying to get them to entrust their money to them.
And they seemed to believe it. They seemed to believe that savvy professionals using sophisticated technology and special financial knowledge would be able to help them increase their wealth for a small fee. And I knew, having been in the industry, that none of this was true. It was a lie. It was the big investment lie.
Tavis: All right, so we know what the big lie is. In short, the big lie is that they can do better than we can do for ourselves. The question, I guess, now, for me at least, is how is that big lie sold? Because back to my earlier point, this is a billion dollar, multi-billion dollar industry. So tell me how every day they perpetrate, how they sell us this lie. And they're obviously doing a pretty good job of selling it.
Edesess: There's a chapter in my book that I particularly like. And it shows how the sham statistics used in the industry to sell investment products could equally well be used to prove that a particular brand of cigarettes actually prevents cancer rather than causes it. This is the level of distortion of statistics that's used in the industry.
And why exactly it hasn't been thoroughly uncovered and widely known is hard to explain. I think that people really have a great desire to believe that somebody, somewhere, can make them wealthy through investment. If they can just find the right person.
Tavis: Maybe it's not even just that we're all craving for somebody to make us wealthy, although there is certainly some truth to that. Nobody wants to be poor. That said, we live in a world where we are sold this bill of goods that every field has a set of experts. And the truth of the matter is that God does gift each and every one of us in uniquely different ways.
So why could it not be the case that were money matters are concerned, there are persons who've dedicated their lives to that, and these persons would have to know more, and have to be better at investing my money or doing something else with it that I would be, because that's what they've spent their lifetime doing. Studying, preparing, reading, staying on top of that.
I'd like to think, with all due respect, that I'm a better talk show host than you are. And I say that with (laugh) humor, but I say that because this is what I do every day. If I'm not better than Michael Edesess at hosting a talk show, I need to get out of this business, 'cause this is what I do every day. I would assume then, respectfully, that you know money matters better than I do. So what's wrong with me believing that?
Edesess: I agree. If you're not a better talk show host than I am, then you should get out of the business.
Tavis: (Laugh) Okay, we agree on that, at least.
Edesess: (Laugh) I'm sure you're a much better talk show host than I am. What you have just said is exactly what I have realized is the problem that I've had with friends of mine who are very smart. They are professionals in some area. I have a friend who will, if he sees this show, he'll know who he is. (Laugh) He's an expert structural engineer with a high level of integrity.
A high level of knowledge. But when it came to investments, he felt that he doesn't know that, so he will go to somebody who has an equally high level of integrity and knowledge.
Tavis: Exactly.
Edesess: In his field. And it's quite understandable why somebody would do that. But, the problem is that as counter-intuitive as it may seem, knowledge and wealth, even, having gotten wealthy in the business does not make you better at being able to pick investments that will do better than a naïve strategy, than if you didn't really know anything. Now, my book does have a lot of explanation about why that's true.
Tavis: Right.
Edesess: And it has to do with the fact that in order to predict prices, you have to be clairvoyant. Because you'd have to be able to predict the future events that cause prices to change. And nobody can do that. It doesn't matter how much knowledge you have. It's very similar to the fact that - well, let's take a coin toss. Nobody can predict the result of a coin toss, even though it's a matter of physics. If you're an expert physicist with a PhD in theoretical physics, it won't help you to predict the result of a coin toss.
Tavis: Fair enough.
Edesess: And in the same way, not exactly the same way, but in a similar way, it really doesn't help you to be an expert economist or anything like that.
Tavis: Let me ask you right quick, I got about a minute to go here, let me ask you right quick, then, and aside from reading the book, we'll talk about that in just a second, aside from reading the text, what's the one thing, the one piece of advice, that you tell folk most importantly to understand when they're going to take control, then, of investing their own money?
Edesess: I think the most important thing to understand, really, when you're considering going to an investment advisor, at least the ones that advertise a lot, the big ones, is how much it costs you. It costs so much that it will take away half or more than half of your investment earnings. I didn't even realize this myself until a cousin of mine asked me if he should do it, and I did a calculation.
And I found out that if he went with an investment advisor, one of the big name firms, that he would have less than half the gains that he would have had if he didn't go to them. It's an easy calculation.
Tavis: I hear you. The new book by Michael Edesess is called “The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know.” I'm sure mine will be calling me after this show goes off the air to slap me for even doing this conversation, but that said, it's done. Mr. Edesess, nice to have you on the program. I appreciate your insight, sir.
Edesess: Thank you very much, it's my pleasure.
Tavis: Thank you, sir.
Back to January 23, 2007