Who Needs Friends?
By Bob Kronish
Do you know what the biggest danger is in today's financial markets? Too many friends. The more friends you have, the more likely you are to hear of their investment conquests. It seems everyone owns AOL and Yahoo, not to mention all the other dot com and dot net companies or funds—and everyone, except perhaps you, is making tons of money and gloating abut it to boot. It's the same disorder you observe when someone comes back from Las Vegas or Atlantic City. Did you ever hear anyone admit they lost money in a gambling casino? The real mystery is how these casinos stay in business with all those winners.
The long-term probability of winning the investment game by buying companies (or mutual funds that invest in such companies) with no profits and stratospheric stock prices, is probably worse than the odds of winning in the casinos. However, if you are willing to bet the munificent sum of $24.72, I can provide a sure-thing winner. I know, I know—every investment tip you ever received turned out to be a dog. But this one comes with a guarantee. Following this advice will insure that your investment, while rarely beating the market, will come within a fraction of doing as well as the market averages.
The downside is that during your coffee break or a visit to the water cooler, you won't be able to brag about all the green stuff you made the past week when your hot shot stock moved up 20 points. The upside is that you won't own it when it drops 200 points. Where do you send the money? Unfortunately, not to me. Jump on amazon.com (they need the business desperately if they are ever to produce a profit) and order John Bogle's new book, Common Sense on Mutual Funds. This is a primer of exceptional value that every mutual fund investor must read. Don Phillips, CEO of Morningstar says, "it may well be the best book ever on mutual funds." Read it and you will say, "Who needs friends."
The Reality Prospectus
By Bob Kronish
Albert Einstein was quoted as saying, "As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality". Substitute the words "the prospectus" for the word mathematics and Einstein's observation is equally accurate. Of course, mutual fund companies assume (rightfully) that no one bothers to read the prospectus, and even if they did, little of its contents would be understood. Here is a case where a bit of paranoia might be valuable. It is my contention that mutual fund companies deliberately obfuscate so as to insure that pertinent information that would help investors make informed and rational decisions remains unintelligible.
Knowledgeable investors, as well as those in the industry who perpetuate the cult of the mystifying prospectus, know full well the information provided is incomplete at best, and misleading at worst. Despite the efforts of Arthur Levitt, Chairman of the SEC, to remedy the problem, insufficient progress has been made. In order to clarify the issue and provide investors with reality instead of fantasy, I suggest the following generic prospectus be considered. Almost every fund company could then use the exact same prospectus for the vast majority of their funds.
THE GENERIC PROSPECTUS
Purchasers should be aware that this mutual fund has failed to provide returns that outperformed, or even equaled the performance of an appropriate benchmark index in the past; nor is it likely it will do so in the future. Return performance has been hindered by the following factors: 1) Costs that are higher than they should be; 2) Expenses that are used, not to benefit shareholders, but to promote and advertise the fund in order to increase the asset base (and thus fees paid to management); 3) Exorbitant fund family profits, so that the corporation may gratify its public stockholders and pay the fund manager extravagant, though undeserved bonuses. 4) Excessive turnover that leads to higher trading costs, taxable long and short term capital gains, and consequently lower after tax returns; 5) Board directors who fail to exercise their fiduciary responsibility to represent and protect shareholders.
The average investor would be far wiser to invest in a diversified portfolio of index funds as opposed to the clinker referred to by this prospectus.
Take note, Mr. Levitt.