Mutual Fund Disclosure February 26, 1999March 25, 2012 Jeffrey Sheff: ‘How come we have to wait 6 months to a year to find out (in a prospectus which takes 6 weeks to arrive by snail mail) what stocks my fund held a few corrections ago? A fund which may have replaced 100+ per cent of its portfolio in the meantime, and thus, by not letting the cat out of the bag, has left you buying a pig in a poke? My intelligence, such as it is, is offended when I receive a quarterly report months after the period has ended. My suspicious mind wonders if the plausible rationalizations of the fund managers for its performance may not have had the benefit of more hindsight than it appears from the report date. Could you clarify this situation for me? Or, better yet, agree with my annoyance at this state of affairs?’ Cats, bags, pigs, pokes . . . hmmm. I certainly appreciate your frustration. I see pros and cons to more contemporaneous reporting. The pros are, simply: why not? Disclosure is almost always good. It’s your fund – why shouldn’t you be allowed to know what’s in it? Indeed, just as you call your own portfolio up to the screen each day, why not be able, through the Internet, to call up your fund’s portfolio? Yes, this would be a waste of your time. But surely not the only way you waste time. (Coming to this column each morning might itself be considered . . . well . . .mumble mumble.) Yet there’s another side to this story, as thought through by my esteemed friend Less Antman. First of all, says Less, to keep from driving the price up or down, a fund manager will often take weeks or months to build up or liquidate a position in a stock. Releasing information promptly would tip his hand – Magellan has started selling Yahoo! … Run for the hills! – and that could hurt the price he’s able to get his shareholders. Second, mutual funds should be considered long-term investments. There is no pig-in-the-poke when the investments of the fund are published semi-annually and performance is released daily. It’s probably a mistake to invest based on what a fund owns rather than on its policies and performance. In choosing funds, you’re choosing managers, not stocks. (It seems Jeffrey’s metaphors were not mixed. Buying a pig in a poke, I now find, refers to the old English custom of scamming the gullible by putting a cat, not a piglet, inside a poke — a little version of which sewn to your pants would be a pocket — and hoping the buyer would not insist on a look-see and let the cat out of the bag.) Note, too, that the delay in publishing reports hangs party on the legally required audit. Most of the large firms, including Vanguard and American Century, are making their reports available online the instant they are approved by their accountants. The managers don’t write the explanations of results 6 weeks after the report date, Less says; they write them almost immediately. It is the delay for accounting and legal reasons that are to blame. So, Jeffrey, do I share your annoyance? Well, not entirely. I’m more annoyed by high expense ratios or poor performance. But you definitely have a point.
Reader Mail February 25, 1999February 12, 2017 FREE ROTATION “I have my own little way of saving $35 after tax every two or three months,” writes Dave Pouso. “Please note that my friends think that I have sunk to an all-time low in cheapness (I call it being able to retire at 45 and being able to afford traveling more than they). Well here it is, as trivial an amount as it may be. Most car manuals suggest that you rotate your tires every three months. This can run between $20-$40. However, Sears (you can see why my friends cringe — if it were Banana Republic or Arocrombie & Fitch they would be all over it) does it for free! Even if you did not buy your tires there. They don’t even try to sell you anything!” Thanks, Dave. You actually rotate your tires? Does this mean you also turn over your mattress (and rotate the corners ninety degrees) every season? That you change the filter in your air conditioner? I am impressed. Yes, I clean the filter of my dryer after each load, but that’s free and easy and oddly satisfying. The fluff is clean and warm and soft. And removing it keeps the dryer from catching on fire. OBVIOUSLY, SOME PEOPLE CAN BEAT THE MARKET “If the stock market is as efficient as you say it is,” asks Bob Iserman, “how can investors such as Warren Buffett and, in the past, John Templeton consistently beat it? Is doing your homework and investing in stocks intelligently really such a hopeless pursuit?” The $64,000 question. And the answer is: for most people, yes, it’s hopeless if the standard is beating the market — and by enough to justify the time and effort spent to do it. Buffett and Templeton (and Peter Lynch) are so interesting because they are so rare. There may also be some elements of self-fulfillment in this, but there’s no question in my mind that the success of those three, especially Buffett and Lynch, is more than just luck. Remember, I’m a random walker “with a crutch.” I.e., there’s some room to beat the market significantly over the long-term. But very few do or will. YOU’VE GOT NO MAIL You send me e-mail. When I can, I click REPLY. But then sometimes the replies bounce right back as “undeliverable.” (Why is that?) And then I try again, this time cutting and pasting your e-mail address – and still it comes back. So you never even know I tried. Frustrating! Anyhow, to those of you I’ve tried but failed to answer, like Burr (Hey, Burr! Your e-mail isn’t working!), let this reply apply to all: “Thanks, Burr. What a great message! I appreciate your taking the time to write.” I do. Burr – are you there?
Happy Andyday February 24, 1999February 12, 2017 Well, almost everything has a silver lining, and the great advantage to my no longer getting paid a billion dollars a year to write this column every day the market is open (thank you, Ameritrade, it was great) is that every once in a while — I hope not too often — I get to declare an Andyday. (The benefit to Ameritrade is that my absence seems almost instantly to have quintupled its stock. A billion dollars a year is quite a drag on a little company.) Happy Andyday.
Do the Indexes Reflect Dividends? February 23, 1999February 12, 2017 Recently, I wrote: . . . it’s worth noting that, by one measure, anyway, “the market” is not at 9,300, it’s at more like 14,000. Which from a low of 1,700 12 years ago is a healthy octuple, nearly a 19% annual rate of return — plus dividends — or about double, if not a little more, than the “normal” return. To which Thorsten responds: “Plus dividends?? I’m not sure about the Dow, but at least the S&P 500 index already contains the dividend payments of the stocks in it. Otherwise the Vanguard Index fund and SPY etc. would do about 1% better than the index itself (dividend yield minus fees), because they do receive dividends.” Well, no. The S&P 500 index doesn’t contain dividend payments. The comparisons made by the Vanguard Index fund, SPY, etc., are with a specially computed figure that combine the price appreciation of the S&P 500 and the dividend returns. (Both the Vanguard Index fund and SPY themselves pay dividends every year — namely, passing through the dividends of the underlying stocks.) So when you see rules of thumb about the stock market historically returning 9% or so a year, that was not appreciation of 9% a year but, typically, 5% or 6% in price gains plus 3% or 4% in dividends. Of course, you don’t see the 9% number much any more. Now you often see 10% or even 12% as what you can expect of stocks — the historical norm. But that’s because the last 17 years have been so phenomenal, raising the historical norm. There are those who believe in “regression to the mean,” which in Biblical terms simply means that seven fallow years follow seven fat. So all these above-average years of late have been swell. Truly. But though they raise the historical average, they do not necessarily raise the gains we can expect of the future. And dividends, I am so old-fashioned as to believe, might even one day come back into fashion, especially if we ever stop double-taxing them. They are, after all, cash. And cash is useful when you need to, say, pay for things.
Bill’s Excellent Proposal February 22, 1999February 12, 2017 OK, I suggested something a little like this 29 years ago, in The Funny Money Game, when I proposed taking my 22-year-old self public. But reader Bill Saguto has really done this much better: “I have a proposal for all of those people ‘investing’ in computer/Internet stocks,” Bill writes, “with prices that are hundreds of times their prospective earnings five years out. (Or investing in any other stocks with ridiculous PE ratios.) Simply give me $30 million dollars, which is approximately 300 times my projected earnings in five years, and you get my paycheck and I am stuck living off of whatever I manage to make off of the thirty mil. The advantages I offer over computer stocks: “1. I have a job and have positive earnings now. “2. I will take out life, disability, and extra unemployment insurance so you are guaranteed a return even in the darkest of economies, and payback of your initial investment when I pass on. “3. To replace the excitement factor, every month I will roll a die and give a 50/50 chance that one investor will win $100k. The investor will be randomly chosen with the odds being increased based on his investment. This would be paid out of my thirty mil, as would be the insurance premiums and other expenses. “4. Then I will open an options market. You would be able to sell someone else the right to your monthly entry in the die pool. As market-maker, I would take a little bit of each trade-enhancing my earnings, and thus your pay-out, even more. Just think of the possibilities.” Sounds good to me. I’ve long felt the U.S. Treasurer, “if she really wanted to sell her bills,” would add a little lottery feature to them to add some excitement. Drop the yield a tenth of a percent but add a $25 million jackpot. Now you’re talking. I think Bill is onto something big.
Why These Stupid One-Cent Stamps? February 19, 1999February 12, 2017 I have no problem with the new cost of a first-class stamp. The extra penny is obviously trivial, and even 33 cents is a bargain compared with, say, FedEx. It’s the extra time that gets me-having to buy all those sheets of one-cent stamps (lick-on, only; adhesives not available). All that little folding and tearing and licking and sticking. And the idiotic idea of someone returning your letter because you forgot the extra penny. AND IT’S COMPLETELY UNNECESSARY! All they had to say was: 1. From now on, no new 32-cent stamps will be produced. 2. But all existing 32-cent stamps will be accepted for mailing a letter. The result? Just much easier for everybody. I can think of only two conceivable objections: 1. It would give some people with lots of stamps an unfair advantage. Oh, please. A few lucky souls with rolls of 32-cent stamps would save a little money. But even this wouldn’t be unfair. Sure, I, with my 10 rolls of stamps, would ultimately save $10, while you with your four stamps in the top right-hand drawer of your desk and that other now-somewhat-wrinkly-one next to the paperclips would save only 5 cents. But (apart from a rousing who cares!) it actually evens out. Because by buying my 10 rolls of stamps a few months in advance, I was in effect giving the USPS a $320 interest-free loan. So this $10 can be thought of as just a little interest. 2. It would cut into the projected revenue from the rate hike. Oh, please again. If this were a concern, and it’s hard to imagine it really could be (bear in mind, this little convenience wouldn’t affect metered mail or all the other classes of postage), the USPS could just have moved up the “effective date” of the price-hike by a week or two. (Starting sooner would have meant more extra pennies sooner, thus balancing out the pennies “lost” by accepting 32-cent stamps for first-class mail.) The Post Office does a great job, but readers of this column will know this is the second time it has made me mad with pointless user-unfriendly regulations. (See “Going Postal,” if I ever get the ARCHIVES up and running on this site.) You don’t want to be around if I get mad a third time.
Dow 14,000 February 18, 1999March 25, 2012 You may have read this a few weeks ago the same place I did, although for the life of me I can’t remember where. (I think it was Barron’s.) But it bears repeating. And it’s this simple. If you lay the graph of the Dow Jones Industrials on top of the graph of the Standard & Poor’s 500, you find that for decades, according to the table in Barron’s (Barron’s?) the two lines are all but identical. It’s as if you compared two temperature graphs, one in Celsius, the other in Fahrenheit. Well, not that identical, but close. You just have to multiply the S&P number by 11 to get the Dow. (With Celsius, you multiply by nine-fifths and add 32. How can I remember that from 40 years ago and not where I saw this article three weeks ago?) And then a couple of years ago, a remarkable thing happened: Both lines, the one for the Dow and the one for the S&P were rising, as they had been, with occasional dips, drops and bumps, for decades. But now the line representing the S&P 500 veered upward and left the line for the Dow in the dust. This is significant, because the S&P 500 is a much better guage of "the market" than the Dow. Neither one reflects the entire market, to be sure. But the S&P includes 500 of our largest companies, not just 30. And it is "market-cap-weighted," whereas the Dow is still figured the same irrational way it was 100 years ago, before the advent of calculators and computers that would have allowed a sensible calculation. So if the S&P 500 has veered upward, that suggests that the Dow, were it really the proxy for the market that Nightly News viewers assume it to be, would be a lot higher. At the 11-times conversion that prevailed for so long, it would be nearly 14,000. This doesn’t mean I know where the market is headed. Just that for the majority of us who remember Dow benchmarks and not S&P (or other even broader) benchmarks — Dow 777 in August of 1982, Dow 2,700 or so in 1987 before a slowish decline to 2200 and then that one-day 508-point drop to 1700 or so — it’s worth noting that, by one measure, anyway, "the market" is not at 9,300, it’s at more like 14,000. Which from a low of 1,700 12 years ago is a healthy octuple, nearly a 19% annual rate of return — plus dividends — or about double, if not a little more, than the "normal" return. Then again, much of the new world economy is being driven by astonishing technological breakthroughs, and Moore’s Law holds that computing power will double every 18 months — or did until it started doubling even faster — and that suggests the possibility, at least, that productivity can grow faster than it used to. (Does it also mean profits will grow faster than they used to? After all, it is for a share of profits, not output, that investors invest. For example, as the Internet streamlines the distribution process and decimates middlemen, it will also allow much sharper price competition. This is great for consumers. But will it be great for investors?) So on the one hand but on the other hand but then again and then again. All I know is that I don’t know. But I’d say the bargains are few and far between. Tomorrow: Why These Stupid One-Cent Stamps?
Why Most Funds Can’t Consistently Beat the Market February 17, 1999February 12, 2017 Sorry Greg. If you could beat the market in two hours a day, why wouldn’t the mutual fund managers who spend ALL day on it be able to? [February 4, 1999] Tom Williams puts it this way: “I wonder if the answer to the question you posed to Greg is that because the mutual fund managers have lots of money invested in a lot of different stocks, they are more subject to the law of averages than the little guy who can target fewer stocks. No doubt the average single investor doesn’t beat the market, but it’s probably true that a few do much better than the market while others do much worse. Which is what everyone has known all along: if you are willing to take more risk, you MIGHT make more money. And Greg might to. He just needs to understand that there is also a good chance that he won’t.” Yes. And this actually breaks into two questions. The first is purely about risk. For example, in the short run, stocks are riskier than savings accounts. But if you take more short-run risk, you are very likely — even if you’re just an average Jane or Joe — to do better over the long run than if you had played it safer. (Warning: Not everyone . . . indeed relatively few . . . can afford the long run. If you have a car loan and credit card balances, etc., you should not be in the market. It’s only with money you won’t need to touch for many years even if the roof needs to be replaced that you can invest for the long term.) So, yes: prudent risk — risk thoughtfully and soberly assessed and accepted — yields rewards. (Taking risk-for-risk’s sake, by contrast, can pay off — people do win the lottery — but is generally dumb. You are paying for a thrill, not investing.) And it’s not magic. One way to look at it is that the market pays you to take risk. Another is that, with stocks, you are investing in actively managed wealth-producing enterprises that, taken as a whole, over the long run, will likely grow and prosper. So it just makes sense that owning a piece of them would do better for you than keeping your money in a savings account. (Or look at it this way. The money you put in the bank or a bond you are, in effect, lending to company that’s pretty sure it can earn a higher return on it — or else why would it be paying you this interest to borrow this money in the first place? So you can lend it at a low rate, or buy a piece of the business, or the bank, that thinks it can earn a higher rate, a little sliver of which, in theory at least, as a tiny co-owner of the business, will be yours.) One more warning here: With the Dow at nearly 14,000 (yes! I’ll explain tomorrow), there may be more risk in the market and less potential reward, than usual. Risk really does have its ugly side. Look at the investors in Russian stocks in 1916. Or Japanese stocks in 1989. Or Trump Hotels, symbol DJT, the Donald’s initials, at 35 (it’s 4 today). But the second question is, for any given amount of risk, can you consistently do better than others taking the same level of risk? I.e., if you and someone else both choose the stock market . . . and if, what’s more, you both choose a handful of fairly risky stocks . . . one of you may do much better than the other this year. But is it because one of you was smarter? Or is it, rather, because one of you was luckier? Surely at the roulette table or the slot machines, we credit success mostly or entirely to luck. We don’t assume that the fellow who left the roulette table a winner last night will likely leave it a winner tonight. Yet we do tend to assume that last year’s outstanding stock-market performers will be among next years as well. A little of that assumption is sometimes justified. But not nearly as much as we instinctively think. Tomorrow: Dow 14,000.
More Fall-Out from My Skepticism February 16, 1999February 12, 2017 Sorry Greg. If you could beat the market in two hours a day, why wouldn’t the mutual fund managers who spend ALL day on it be able to? [February 4, 1999] Mike Fitzgerald: “This comment from an investment guy? That would mean you shouldn’t be picking stocks, which I know you do. Seems like I’ve read that 80%-90% of the mutual funds underperform the market (let’s say the S&P 500). Given that, I think the odds are very good on beating the market – even in the long run.” No, the odds of beating the mutual funds are fairly good — especially those that charge the highest loads and fees. But the odds of beating the index funds, which have almost no drag from sales fees and annual expense charges, are not good. For more on this, see February 9. “The reason the mutual fund managers have such a hard time beating the market [Mike continues] is that they have such huge amounts of money to invest that they in essence become the market.” Well, there’s a lot of truth to that. But that would more or less just put them even with the market, not behind it. And there are lots of funds with “only” a few billion to invest — and these days, you could easily spread a few billion over just a handful of stocks if you wanted to, albeit the larger ones. It’s the sales and expense fees that pull mutual fund performance down below the market. “But for us small guys all we need to do is latch onto a couple of extraordinary stocks during our life time and hold for a decent amount of time. If you would have invested a few thousand dollars in Microsoft, Cisco, Amazon, Dell, AOL, etc. at the right time you would be rich in a few years. Yes, you have to be willing to take the risk, but that’s what it’s all about. The risk in investing in a mutual fund is also high (below average returns), so why not try to beat the market? And you don’t have to be a genius and spend all of your time doing so and you don’t have to be stupid either (risking it all on penny stocks). Anyway, I’ll continue to try to beat the pros and I’m confident I will.” And I hope you do. What are tomorrow’s Microsofts/AOLs/Ciscos? Let us know your list and your reasons for choosing them. The floor is yours. (But remember, “the market” includes today’s huge winners — indeed, the names you mention account for a huge portion of “the market’s” recent sizzling performance. So “the market” has owned those winners along with the rest, and benefited from them. To beat the market, you need not only be smart enough to own some of the future winners, but to own a disproportionate share of the future winners, and be underweighted with those that fail to pan out. That’s the part of the trick few manage to pull off over the long run. But some do, and you could be one of them.) Tomorrow, more thoughts on the same theme. Coming soon: Why These Stupid One-Cent Stamps?
Fish-and-Chips So Good We’ll Pay you $1.09 to Eat Them February 12, 1999February 12, 2017 Why does this delight me so? For those of us lucky enough to have the basics, life is a game — that’s why. I refer here to the menu at Captain Crab (which actually has a slightly different name — the Crab House, I think — but that’s what I call it) on the 79th Street Causeway in Miami. It has other locations as well. (Indeed, if memory serves it is a tiny public company.) So here’s the deal. They’ve got this great salad bar. Yes, there’s lettuce and even tuna salad and all that — no one cares. What they really have are freshly shucked clams and oysters (and peelable shrimp and mussels and this awesome ceviche and crabs). Now, where I come from, that’s a salad bar! I am an old hand at this, shunning tables “by the water” (water, water everywhere) for a table near the salad bar. And I well know that it’s $16.95 if you have the salad bar as your entrée, or $7.99 if you have it with an entrée. Imagine my surprise, therefore — and the new ka-CHING set of calculations it promptly set off in my head — when we were seated the other night and informed of the new prices (new to me, anyway): $17.99 if you have it as an entrée, $5.95 with an entrée. Now, the truth is, I scrimped and saved so long getting compound interest to work for rather than against me, it doesn’t much matter what the salad bar costs. And we actually had the jumbo stone crabs, which cost about a million dollars. (Ah, but would I have had them had I been paying? Well, maybe not.) Still, all I could think of for the first half of the dinner — forget impeachment, forget auto insurance reform — was what they were really saying with this new menu. What they were saying, nestled among all the more expensive entrées, like the stone crabs, was that if you wanted the salad bar as an entrée for $17.99, they would in effect pay you $1.09 if you’d be willing to accept a free entrée of fish and chips to take home to the cat. (I don’t have a cat. I don’t like cats. But you get my point.) That’s right. At $10.95, the fish-and-chip entrée (which itself comes with a big salad) appears to be the cheapest thing on the menu. Add the all-you-can-eat-and-they-give-you-two-big-refillable-dinner-plates-to-load-up-on-it salad bar for $5.95 and your total comes to: $16.90. Or else you could pay an extra $1.09 and skip the fish and chips. Now it may be that this is fiendishly clever . . . let people think they’re beating the system, and they’ll keep coming. And by the time you’re done with drinks and desert and coffee, etc., you still are not exactly eating on the cheap, anyway. This is not Wendy’s, after all. (Have you tried Wendy’s Veggie Pita? It’s a giant juicy $1.99 slice of happiness.) So maybe a true gamesman at headquarters did this purposely, to appeal to the segment of our dining public that thinks as I do — the twisted segment. Or maybe they figure a few people will actually eat the fish and chips, thereby cutting down on their consumption of the much more costly freshly shucked oysters and the awesome ceviche. (This is obviously not a trap I would ever fall into. I would sooner buy a cat.) Or maybe it was just one of those things. In any event, it’s the current state of affairs at the Crab House; it applies almost as well to the $11.95 seafood-pasta entrées; and I felt you should know about it. Why does this delight me so? For those of us lucky enough to have the basics, life is a game — that’s why.