Downdraft

 

For the year 2000 we have seen hundreds of mutual funds lose 40%, 50% and more of their value. This does not seem right since the fund is supposed to be managed by a professional. How can this "professional" do such a bad job? More than half of the funds this year will not out perform the S&P500 index which closed down about 10%.

What is going on?

When you put your money in a mutual fund you are supposed to be hiring someone who knows how to make money. He should be able to do a better job than you. But he has not. If this person worked for me I would fire him. You don't hire people to lose money for you.

Now that you have fired this bum let's examine why he did such a poor job (pun intended). Each mutual fund has one or more analysts who are supposed to be able to determine if the stock of a company is a good buy. That means will it go up?

These so-called analysts do the kind of research that Wall Street says is necessary before purchasing a stock. Yes, they do all the standard things that anyone can do such as determine company growth, profit margins, P/E rations, cash flow, etc., etc. They get all that wonderful information from Morningstar and apply statistical analysis you and I would never think of. And when it comes right down to it what do they have? You can research something until you are blue in the face, pile on information upon information, but there is one thing all this nonsense will not tell you. Will the stock go up?

The kids who do this analysis (sorry, kids, you're only a man when you pick a winner) have an agenda. For the fund-type analyst he wants to find a stock that will not go down because that hurts the fund manager who gets paid not by performance but by the amount of money he can keep in the fund. He gets to skim his percentage off the top every year and never has to make the investor any money. Like paying someone to mow a parking lot.

Let me give it to you in plain language. Fund managers don't know how to be wrong. It is OK to be wrong, but when they have picked a dog and it starts down they refuse to get out to preserve capital. There is no excuse for any mutual fund to lose 30% or more of its capital. They only know how to buy and hold. Many times there is nothing to buy and cash is the only good position, but they don't seem to understand that.

When I was a floor trader on the exchange I was only right about 40% of the time, 20% I got out even and 40% I took a hit. When I was wrong I ran, did not walk to the nearest exit. Losses must be kept small. These money managers have never learned that basic rule. In one of the Woody Allen's movies he was asked what he did for a living. He said, "I am a money manager. I manage peoples money until it is all gone." Does that sound like your fund manager?

Isn't it time to find a fund that is going up?

Copyright 2005

 



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