The Investor's Paradox

If you have ever considered investing your money with a portfolio manager, a hedge fund, or a mutual fund, you should read The Investor's Paradox: The Power of Simplicity in a World of Overwhelming Choice by Brian Portnoy. The author delves into all the issues involved in choosing a money manager, especially considering the overwhelming amount of data available to review, the risk of Madoff type scammers, and the unreliability of track records.

Portnoy covers how the amount of choices available to investors is huge, and how many experts are really so-called experts who can't predict the future and can be overwhelmingly wrong. The examples he includes are great. For example, there are a few quotes in the book from Ben Bernanke, the former Federal Reserve Chairman. On January 10, 2008, shortly before the recession, Bernanke said, "The Federal Reserve is not currently forecasting a recession." (The recession actually began in December of 2007.)

Chapter 5 is a great read, which gives a very clear set of explanations about why so many people fell for Bernie Madoff, and how Madoff was so successful in raising money.

The author presents numerous research showing that active management was no better than buy and hold, or no better than chimpanzees throwing darts at a list of stocks. Portnoy does finish the book with some useful advice for investors choosing portfolio managers. If you are in that position, I recommend you read The Investor's Paradox: The Power of Simplicity in a World of Overwhelming Choice.