Race Horses and Mutual Funds


For years investors have been taught to lookinto the composition of a mutual funds. In otherwords the "experts" want you to take the time toanalyze the stocks within the mutual fundportfolio, categorize them by industry group andtry to understand the objective of the fundmanager. This is nonsense.

When I go the track I look to see what the horsehas been doing for the last several races. Idon't give a hoot what he had for breakfast. AllI want to know is has he been fast? Is there agood chance he will finish in the money in thenext race? I only want to know how he has beenperforming.

Most mutual fund managers, except those whofollow index funds, are always trading. You haveno idea that what is in the portfolio today wasthere yesterday or will be tomorrow. Some fundmanagers trade more than others, but you canprove this to yourself by looking at the fundprospectus at the beginning of the year and oneof the updates that funds publish quarterly. Many of the stocks will still be there, however, you don't know if the percentage holdings arethe same.

By the way, don't bother reading a mutual fundprospectus. They are worthless when it comes tomaking money. Consider that most of theinformation in it is about a year old by thetime you read it. Think about this seriously fora minute. Is there anything you can find out inthe document that will show up in your bottomline? I'll wait while you think. OK? Therereally wasn't anything was there? Allprospectuses are basically worthless.

But you say the SEC (Securities and ExchangeCommission) in Washington approved this. No, they did NOT. They don't approve of anything;they just read it to be sure it meets theregulatory requirements for disclosure. There isalmost no difference between the prospectus forthe worst mutual fund and the best mutual fundand both of them may have been read by the sameDilbert in his cubicle at the SEC.

There is one excellent way to find out whichfund to buy. It is based on performance. Howmuch has the fund increased in price during thepast 12 months? Just 12 months. Many financialanalysts want you to look at 3-year, 5-year and10-year performance. Remember that horse? Idon't care how many races he won 3 or 5 yearsago. Can he run NOW? There are many publicationsand web sites that tell you the best performers. Investor's Business Daily prints a list of bestperforming funds each day. You might have to seethe paper every day as they sometimes just tellabout the long-term performance. You want thelast 12 months and the last 3 months.

Three years ago you could have bought the bestperforming fund on the street and today have adog. I call a dog any mutual fund that is notoutperforming the S&P500 index.

If you were a jockey you would want to ride thefastest horses because in many races you get apercentage of the purse. The same applies tomutual funds. You must own only the bestperforming funds at all times. Like the jockeyyou must pick the fastest horse if you want tobe a winner.

You should review your fund holdings monthly tosee that you are only in the best funds. Itmight take you an hour, but you will find thatyou will double the current return on yourmutual fund investments. Do it!


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