I reflected briefly on the story behind Fred Schwed’s classic book, Where Are the Customers’ Yachts: Or, a Good Hard Look at Wall Street (1955). The young innocent was given a tour of the New York waterfront. His guide proudly pointed to the investment advisors’ yachts and the bankers’ yachts, at which point the young visitor asked the telling, title question: "But where are their customers’ yachts?"

But then I realized that I was sitting on a bench at Hyannis, on a perfectly beautiful summer’s day. We were having a grand time on vacation, eating fresh seafood and going for companionable walks. At which point it struck me: I didn’t really need a yacht. Heck, I didn’t want a yacht and wasn’t particularly impressed with the folks who did.

At which point the sun seemed just a little bit brighter.

David’s boldest prediction for the Year 2008

The phrase "the lost decade" is going to be become immensely annoying, sooner rather than later.

The phrase is normally invoked as a description of the misery in Japan’s equity and real estate markets during the 1990s. Unfortunately, American pundits have latched on to the term as a description of the lackluster performance of the S&P 500 since the late 1990s. The S&P 500 returned about 2.8% annually across the decade, noticeably less than the historical inflation rate. One illustration of the phrase’s popularity is that July saw 65 articles lamenting "the lost decade," plus over 80,000 Google hits for the phrase "lost decade" and stocks. The lost decade was discussed in a long Wall Street Journal story (E.S. Browning, "Stocks Tarnished by ‘Lost Decade’," March 26 2008) and was the subject of a John Brennan essay on the front page of Vanguard’s website ("Chairman's Corner: Lost decade, found perspective," retrieved July 1 2008).

Predictably enough, the phrase provided fertile ground for the investing world’s more . . . uhh, opinionated members. William Patalon, for example, opined that "the U.S. economy is headed for a financial Ice Age that will make Japan’s 10 wasted years seem like a single chilly night."

There are three reasons why I find the phrase so endlessly annoying:

1. The American "lost decade" isn’t even a tiny shadow of the Japanese original. During the course of the 1990s, Japanese land values dropped by 70%. The Nikkei 225 dropped around 80% from its peak in 1989 to its trough in 2003. One widely-cited but unattributed estimate is that the Japanese lost $20 trillion in the lost decade.

By comparison, the worst-case estimates of the U.S. mortgage crisis are one-tenth as great and the losses would be spread over a far-larger economy. Further, a $10,000 investment in the S&P 500 ten years ago would be worth $13,200 today. In the case of a Japanese market index, $10,000 would have been reduced to $3,000.

2. It serves as a substitute for thought. An appalling number of the folks who toss about the phrase "lost decade" reached their conclusion long ago. There’s an old saw (variously attributed to Vin Scully, A.E. Housman, Winston Churchill and Andrew Lang): "He uses statistics as a drunken man uses lampposts -- for support rather than for illumination." That’s pretty much the story here.



3. It assumes you were stupid. This whole "lost decade" thing works only if your entire investment portfolio was comprised of the S&P500 index fund, and you invested all your money on one day at the beginning of the period. Almost any variation from that assumed, simplistic path would, suddenly and inexplicably, cause you to make money.

The simplest way to make money over the past decade was to have invested with the mercurial G. Kenneth Heebner, whose CGM Focus fund (CGMFX) returned a respectable 26.3% annually, even after taking an 18% loss in July of this year. A $1,000 investment 10 years ago would be worth over $10,000 today.

But what if you were just a reasonably thoughtful investor, rather than a brilliant or lucky one? You still would have done a lot better than the "lost decade" folks give you credit for. Question: What would have happened if you’d done just three, entirely conventional things to construct your portfolio:

• You diversified between large and small, foreign and domestic, stocks and bonds.
• You rebalanced your portfolio once a year to re-establish your asset allocation goals.
• You invested regularly throughout the decade?

Answer: You likely would have doubled your rate of return while lowering your portfolio’s risk. Here’s how I arrived at the answer. I set up a boring asset allocation: 40% larger US stocks, 20% smaller US stocks, 20% international stocks, 20% bonds. That’s pretty close to the advice that was conventional a decade ago. I then constructed a series of very simple portfolios of two to four Vanguard, Oakmark or Price funds. And I looked at the effects of starting with $10,000, adding $1000/year and rebalancing annually.

Vanguard: Annual return of around 4.5% by rebalancing between the Total Stock Market (40%), Total International (20%), Total Bond (20%) and Extended Market (20%).

Oakmark: Annual returns of around 11% by rebalancing between Oakmark Global (50%) and Oakmark Equity & Income (50%).

T. Rowe Price: Annual return of around 5.3% by rebalancing between Spectrum Growth (80%) and Spectrum Income (20%).

Admittedly 5% isn’t going to help you save up to buy your own yacht anytime soon. But it is about twice the return that the pessimists assume, and it’s achieved with just a little common sense and discipline.

The fate of new funds: my mid-summer highlights

Since I began writing for FundAlarm in April 2006, fund companies have launched 940 new funds and 572 new ETFs. Of those, 670 mutual funds are available to retail investors and 403 have a track record of at least one year. Some quick highlights from newfundland:

The best evidence yet that the bear may be vanquished

David Tice has agreed to sell his Prudent Bear and Prudent Global Income funds to Federated Investors for as much as $150 million ("Federated Makes a ‘Prudent’ Purchase," Wall Street Journal, 7/16/08). Commentators place that price at 8.4% of Tice’s assets under management. That’s steep. It’s steeper still when you realize that Prudent Bear’s assets have ballooned in the past year or so to well over a billion dollars. More typically, the fund has assets in the $500 million range. Reverting to its historic asset size would mean that Federated paid 16% for the Prudent Funds. Since the advisory fee on the funds is 1.25%, that means that Federated has paid an amount equal to what the funds would generate in somewhere between six and 12 years.

I don’t know if it’s logically possible to detect a "top" in a market for bear market funds, but it does seem possible that paying a lot for a very specialized product is likely the sign that you’ve waited too long and the fund’s moment has passed.