Q: Your book has a provocative title. What, exactly, is the “big lie”?
A: The big lie is that professional investment management and advisers can increase your wealth better than you can and that the “small fee” you pay will be worth it.
The fees that they charge take about half your investment return over your investing lifetime. You will wind up paying your professional handlers as much or more than what you will make.
That is fairly typical with the large banks and brokerage firms when you invest the way they recommend.
Q: If so, why are investors willing to spend so much to get so little in return?
A: Even though it is well known that you get nothing added in return, it gets overcome by the presence of the big lie that advisers know more than you know, even though there is decades of statistical proof that is not true.
The general public’s gullibility needs to be broken down. Just because people work in the financial world and make a lot of money doesn’t mean they know how to make money except by charging clients big fees.
Fifty years ago, it was believed that cigarette smoking was cool and even good for you. Now the executives of tobacco companies are regarded as panderers with poor reputations.
A very large part of the financial world that sells investment services should face a turnaround in perception. People should think of them more the way they think of tobacco company executives. They find ways to sell people something that really doesn’t do anything for them. There are exceptions like Vanguard.
Q: You spent many years in the financial services industry. What caused you to become disillusioned?
A: I became disillusioned the first job I had. Because I had a Ph.D. in mathematics, they would take me out on sales calls. They would talk about how sophisticated the company’s analysis was. They would tell clients things that didn’t make a bit of sense. I couldn’t contradict the sales person. Nobody seemed to know it was nonsense.
I tried to stay with it because I thought I could improve the field. I have gotten in and out. I tried to form a company where I thought we would do it better. Then I had some experiences more recently that made me think this is getting more and more ridiculous.
Q: Does it take turmoil in the markets like we have recently seen to expose abuses?
A: The industry is so adept at spinning new products that they can make a failed pitch look good.
The market drop of the early 2000s was a boon to hedge funds. The enormous growth of the hedge fund industry was because people believed something must be wrong with mutual funds. Their pitch implied that hedge funds protect you. We can now see that is wrong. The studies that have looked at this carefully show that hedge funds don’t do better than a naïve buy and hold.
The hedge fund manager typically gets three-quarters of the investment gains over time. The investor gets one-fourth. Most investors in hedge fund don’t know what they are getting. Just watch. The investment world will come up with a new product that isn’t a hedge fund that charges even more.
Q: What is the small investor to do then?
A: The best strategy is to put 50 percent in a total market domestic index fund and the rest in a total market non-U.S. index fund. It is simple. It is the maximum in diversification, minimum in taxes. You can’t beat it.
Q: Does that strategy work in volatile times like these?
A: It will go up and down. Just forget it. You can’t time it. Ups and downs occur because of unforeseeable events, unforeseeable to the markets and the experts.
Q: You devote time to development work in poor countries. How does the reward of that compare with the dollars you made on Wall Street?
A: I am on the board of International Development Enterprises, a Colorado-based nonprofit. The work is primarily in very affordable irrigation technologies for small farms. We sell $12 treadle pumps, which enable a farmer to draw water from the water table to irrigate more land and grow more crops. The return on investment is outstanding.
People here care about what they do, they believe in it and it makes sense. Half of the people I used to work with wished they could do something else. They are happy with the money they make, but not with themselves.
Edited for space and clarity from an interview by staff writer Aldo Svaldi.
