Michael Edesess published The Big Investment Lie back in 2007. Much of the book warns investors what not to do. His ten new commandments, included in this book, tell investors what to do and long-time ITA readers are familiar with these investment guidelines. Here are the Edesess commandments. Edesess amplifies each in his excellent book.
- Follow a wealth-building strategy, not a gambling strategy.
- Stop searching for the Holy Grail: give up the futile quest to beat the market.
- Stop believing that past investment performance predicts future performance.
- Don’t be duped by the false claims of investment managers and advisors.
- Fire managers and advisors who charge more than bare-bones fees.
- Don’t pay anyone to pick stocks for you; there’s no reward for the cost and risk.
- Avoid hedge funds like the plague.
- Know the risks of investing; take only the risk you are comfortable with.
- Keep fees and taxes as low as possible; they can swamp your investment returns.
- Invest only in true low-cost index funds.
What does Edesess mean by commandment number one? Build a portfolio around index securities instead of hiring an active manager to select individual stocks or even worse, pick your own stocks. This is also commandment #6. If one is determined to do some stock picking, limit the percentage to a small number, say 5% or lower.
Commandment #2 is one to avoid, but I do think it is important to know where the portfolio stands with respect to a benchmark such as the VTSMX index. The reason for setting up the ITA Index is to measure the performance of a portfolio with respect to the Strategic Asset Allocation plan.
Commandment #10 is so important I think it should be moved up among the top three. Commandment #4 receives a lot of attention in the Big Lie book. In addition to staying away from investment money managers, I highly recommend shutting off CNBC and other financial channels as they are basically stock pumpers. Use the inverse square law to your advantage. When you double the distance from the source, its strength is 1/4 as strong. Triple the distance and the strength (influence) goes down to 1/9th. Use this principle to your advantage when it comes to CNBC and Fox Business News. Instead, read William J. Bernstein’s latest e-book where he recommends investing equal percentages in three index funds.
Commandment #7 does not pertain to many of us. The primary reason for staying away from hedge fund managers is one of cost. Hedge managers use the 2 and 20 rule for collecting their fees. They charge 2% right off the top and add insult to injury by claiming 20% of the profits. Investors take all the risk while hedge fund managers collect all the fees. Absurd.
Coming in June is another book by Edesess – The 3 Simple Rules of Investing: Why Everything You’ve Heard About Investing Is Wrong – and What to Do Instead. I can almost guess what will be included in the three simple rules. I have the book on advanced order so you will hear more about it in July.