Highlights and Commentary
By Roy Weitz
(Originally posted April 1, 2001)
[Archive Table of Contents]

If you go, don't forget to write: These days, it seems every financial publication and Web site is offering a "Bear Market Survival Guide," or telling you how to "Tame the Bear," or encouraging you to "Bear With It".....In keeping with these journalistic expectations, FundAlarm is pleased to offer its own guidance for surviving these difficult times:

Don't panic.

Alas, we know that some of you aren't going to listen to FundAlarm, any more than you're going to listen to the dozens of other voices that are telling you the same thing.....But we do have one additional suggestion: If you're thinking about selling your mutual funds, at least write down the reasons beforehand.....This has two potential benefits: (1) You may end up talking yourself out of selling, when you see actually see your reasons in black and white and, (2) You'll have a permanent record of your mental state in early 2001, which you can refer to next time you're tempted to panic and sell your funds.

What should you write?.....As we said, you should try to be as honest as possible about your reasons for selling.....For example, you might write something like this:

"I'm selling my funds now because they're down, and I believe they will never recover. I've decided that I would rather take a huge, irrevocable cash loss today, instead of living with a paper loss for the next few months. I'm selling my technology funds because I believe there's no future for technology. I'm selling my health care funds because I believe no one will ever get sick again. I'm selling my financial funds because I believe mattresses are about to make a comeback. And I'm selling my diversified funds because I believe that owning a pool of basically solid companies is a poor long-term investment."

Okay, maybe that's a bit extreme.....Perhaps this is more typical:

"I'm selling my funds now because I'm nervous. I believe in the long-term future of the stock market, but I need a breather. I definitely plan to reinvest in mutual funds, but only at the bottom of the market. Unfortunately, I don't know how to identify the bottom, and neither does anyone else. I know that if I miss the bottom, and the market starts to bounce back, I could miss several days (or weeks) of spectacular returns. I also know that once the market starts to head back up, I'll probably wait until it drops again, which means that I could miss even more of the rebound. At some point, after the market has bounced back nicely, I'll probably decide that the market is too expensive, and that it's too late to get back in. Then, I'll stay in money market or bond funds, which will hurt my long-term returns even more."

Okay, maybe that's extreme, too.....Or maybe not.....In any event, the writing part is a serious suggestion.....Before you sell, put your reasons down on paper, and be sure to include the date.....Write as if you were trying to justify your sell decision to a stranger.....Follow your reasons for selling to their logical conclusions.....Challenge your reasons, and see if they still make sense.....If they do, go ahead and sell with a clear conscience, but keep that piece of paper with your other important financial documents....One way or another, in the years to come, that paper will teach you some important lessons about investing.....If you want to learn from your investment experience, this is a good way to start.


But doesn't FundAlarm encourage people to sell their mutual funds? FundAlarm believes that you should consider selling a fund if it consistently underperforms its benchmark......If a fund is performing better than its benchmark, we believe that you shouldn't sell, even if the fund is losing money.....It's difficult for some investors to accept the idea that a money-losing fund can still be a good fund, but consider this: Of the 437 funds on this month's FundAlarm Honor Roll -- by definition, all benchmark-beaters -- 32% posted a negative return over the past 12 months.....If you believe in benchmarking, then sometimes that's just the way it's gonna be.


Yum, those words are tasty!



  • On March 10, 2000, when the Nasdaq Composite index hit its all-time high (5048), pundit Ralph Acampora predicted that the Nasdaq would hit 6000 in 12 to 18 months.....Exactly one year later, as we know by now, the Nasdaq Composite closed at 2053, down 59%....."Norfolk Southern or Cisco Systems: Where do you want to be in the future?," asked the supremely confident Acampora on that giddy March day.....Exactly 365 days later, high-tech Cisco had dropped 70%, and sad sack Norfolk Southern had gained 40%.
    "Nasdaq tops 5000," USA TODAY, March 10, 2000

  • On February 29, 2000, just before the Nasdaq peaked, financial columnist James Cramer, of TheStreet.com, offered his "top 10 stocks for who is going to make it in the New World".....According to Cramer, "We are buying some of every one of these [stocks] this morning...We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over -- and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own!".....Over the next 12 months, the average fund on Cramer's "top-10" list dropped 80.6%.....Cramer's picks performed only slightly better than the Jacob Internet fund, which was the worst stock fund in the U.S. over the same period, down 83.2%.
    "The Winners of the New World," James J. Cramer, TheStreet.com, February 29, 2000

    In fairness to Cramer, he did change his tech tune a few weeks after this article appeared. But in the article above, he says that the current period is "very far from ending," which sounds like a lot more than a few weeks. Oh well. This is a great example of the now-they're-up-now-they're-down school of financial journalism which, in our opinion, serves most readers very poorly. Some consistency and some perspective might be nice.


Speaking of experts who didn't get it right: According to Hulbert Financial Digest, only 5 of 27 mutual fund newsletters outperformed the Wilshire 5000 index for the five years ended January 31, 2001 -- an unspectacular success rate of 18.5%.....(Coincidentally or not, this is about the same percentage of actively-managed mutual funds that beat the Wilshire 5000 over the same period).....The five top-performing newsletters (none of which we read): No-Load Fund X (23.3% annual return), Equity Fund Outlook (23.2%), All Star Fund Trader (21.4%), Timer Digest (19.1%), and On the Money (17.7%).....Over the same period, the Wilshire 5000 returned 16.93%.
"Do Fund Newsletters Deliver?," Alan Lavine, CNBC.com, March 22, 2001


Surprised? For the five years ended February 28, 2001, the Russell 1000 Value Index has outperformed the Russell 1000 Growth Index.....Go ahead and pinch yourself, if you must, but it's true.....If you had invested $10,000 in each index on March 1, 1996, you'd be about $1,000 richer today on the value side:

IndexValue of
$10,000
investment
(3/1/96 - 2/28/01)
Russell 1000 Value$20,507
Russell 1000 Growth$19,416

Remember those crazy times, way back in 1999, when experts and pundits were predicting the end of value investing?.....They were wrong.....And remember all those experts who predicted a thousand-year reign for growth investing?.....They were wrong, too.....Even thought it's fun to see the growth blowhards finally get their comeuppance, it's also important not to lose perspective during our current crazy times.....If you own a good growth fund, it's eventually going to come back, and if you own a good value fund, it's eventually going to stink.....If you own one of each, that's diversification, which may be the best approach of all.


OK, let's beat up on those growth blowhards one more time: Not too long ago, Janus was the 500-pound gorilla of growth investors, and Janus was destined to change the mutual fund world forever.....Right?.....Wrong.....The table below shows several Janus growth funds paired with several well-known value funds, along with their respective performance numbers for the past five years.....Pop quiz: Which fund performed better over the past five years, the flagship Janus fund, or the stodgy, value-oriented Investment Company of America?.....Take a look below, and prepare to be surprised:

Value Fund/Janus FundStyle5-Year
Return
(% annlz'd)
Ameristock (AMSTX)Large-cap value21.67%
Janus Growth & Income (JAGIX)Large-cap growth21.65%

Selected American (SLASX)Large-cap value20.13%
Janus Mercury (JAMRX)Large-cap growth20.01%

Excelsior Value & Restruct (UMBIX)Large-cap value21.08%
Janus Twenty (JAVLX)Large-cap growth19.94%

Nations Intl Value A (EMIEX)Large-cap value
(Foreign)		18.97%
Janus Overseas (JAOSX)Large-cap growth
(Foreign)		18.58%

[!] Investment Co of America (AIVSX)Large-cap value16.62%
Janus (JANSX)Large-cap growth16.32%

Amer Century Target 2020 (BTTTX)Government Bond*11.01%
Janus Venture (JAVTX)Small-Cap Growth10.99%
* Sorry: It's not a value fund, but we couldn't resist the comparison

Next time any fund company or investment style seems unbeatable -- and it will happen again -- you might want to remember this table.


Now he tells us:



The "money fund creator" is Bruce Bent, of the Reserve Primary Fund, and he's worried about commercial paper, especially in the wake of the California utility crisis.....In January, Scudder and Dreyfus both bought relatively small amounts of defaulted commercial paper from three of their money funds, in order to keep those funds from dropping below $1.00 per share (Scudder Cash Investment Trust, Scudder Money Market Trust, Dreyfus Founders Money Market).....Bent says that his money funds have never invested in commercial paper, and they own only U.S. Government/agency obligations, as well as "prime bank obligations with the highest ratings"*......We seem to recall that prime banks have periodically had their own set of financial problems.....Perhaps another money fund manager, at another time, will have the opportunity to comment on that issue.
PR Newswire, March 1, 2001


Now, that's an endorsement!

"Munis fell by the wayside when the stock market took off, and still haven't really come back. But we are seeing less disinterest."
--Robert MacIntosh, manager of 12 Eaton Vance muni bond funds,
quoted in The Wall Street Journal, March 8, 2001 (Christiane Bird);
thanks to Don Fink for bringing this item to our attention


If you ran a brokerage firm, and you also owned a mutual fund, you might be tempted to occasionally dump some unwanted securities on your fund.....Who are we kidding?.....Of course you'd be tempted, and that's why the prohibition against "affiliated transactions" has been a basic principle of U.S. securities law since 1940.....As you might expect, the securities industry hates the prohibition against self-dealing transactions, and the industry has been waging an aggressive campaign, for several years, to overturn the law.....On the Washington, DC front, the securities industry has again managed to get repeal of the self-dealing rules on the legislative agenda of the House Financial Services Committee.....On the regulatory front, the industry keeps chipping away at the rule by requesting exemptions from the SEC, which has granted dozens of such requests over the years.
The latest self-dealing exemption has been granted to Goldman Sachs, which advises a number of municipal money market funds, and is also a major municipal securities dealer.....It seems that Goldman is such a big player in the municipal market that Goldman funds are supposedly at a disadvantage if they can't buy tax-free investments from the parent firm.....You'd think that Goldman would have discovered this problem before launching its municipal funds, or at least mentioned the problem in the fund prospectuses, neither of which is the case.....In any event, Goldman has received its exemption, and Goldman (the broker) is now on its honor to deal fairly with the Goldman muni bond funds -- which means that Goldman (the broker) can't dump unwanted inventory, sell securities at inflated prices, or engage in a host of other naughty practices.
A Goldman executive (right)
explains the company's new SEC
exemption to one of his mutual
fund investors
"Another Chink in the Wall: SEC Grants Self-dealing Exemption to Goldman Funds," Mercer Bullard, TheStreet.com, March 1, 2001


In addition to everything else, now he's gone bipolar:


--Forbes.com. March 1, 2001


Back in November 2000, we had this to say about the Alpha Analytics Digital Future Fund:

"Smart guy is interested in the stock market.....Smart guy creates quantitative computer model that allegedly captures everything there is to know about stocks.....Smart guy starts mutual fund.....Smart guy's computer model (and fund) perform well for a while.....Smart guy gets lots of press, and some people think "Maybe this is the stock model that finally works".....Smart guy's model fails, the fund crashes, and everyone moves on to the next infallible stock market model.....If it seems like you've heard this before, you have, and (except for the failure part, at least so far) it pretty accurately describes the Alpha Analytics Digital Future Fund.

Just to close the loop: The Alpha Analytics model has failed, the fund has crashed and, even as you read this, the search is on for the next infallible stock market model.


Still feeling the competitive heat from FundAlarm, Morningstar.com adds a new feature to its super-premium "Crystal Ball" service:


Excelsior Value & Restructuring, Morningstar.com, March 22, 2001


We recently received the following article, and we're not sure what to make of it.....It appears to be an unpublished column by Jim Cramer, of TheStreet.com, but it also could be some lame attempt at an April Fool's parody.....We'll let our readers decide.




Smarter Money: The Most Important Thing You'll Ever Read
By James J. Cramer

4/1/01 6:27:52.27 AM ET


I used to be a money manager. Now I work for my readers. So I'm going to tell you something about mutual fund managers that you don't know, but should. Your portfolio, your hard-earned dollars, depend on it. So here goes: Most fund managers work in their shorts.

No, I didn't say they sell short. I said they work in their shorts.

And I don't mean the summer variety. I'm talking about skivvies, underwear, long-johns. Call them what you want, you have a right to know.

Did I tell you that I used to be a money manager? In my day, money managers wore pants, or a skirt. The women, that is. Usually wool, maybe a blend, but always with a nice, sharp crease. And a matching jacket. In the money management business, we called that a suit, and you don't see many suits around mutual fund offices these days.

In my next column, I'm going to name names. Tell you which mutual fund managers work in their shorts, and let the chips fall where they may. I don't pull punches. Never have, and never will.

If your fund manager works in his underwear, get ready to sell. Fast. Because your portfolio depends on it.

I know, because I used to be a money manager.


Briefly noted: