Friday, December 9, 2011

Five signs the investment article you are reading is B.S.

I keep getting emails from a particular contributor to Kiplinger's with headlines like '5 Reasons to Buy Gold Stocks', '5 Best Low-Risk Stock Funds' and '5 Great dividend-Paying Stocks to Buy -- Even Now'.  He used to be a Kiplinger columnist, but now is an independent investment advisor and uses the columns to generate business. I don't know why I even bother looking at such drivel, but apparently it's like a car-wreck that you can't help but look at.

The most recent one was so laughable I had to share.  It was titled "5 Formerly Top-Performing Mutual Funds to Sell in This Market'.  Here is some of the insightful writing:

Legg Mason Value - "Over the past five years, Value lost an annualized 9.4%, while Standard & Poor’s 500-stock index was roughly flat (all returns in this article are through December 6). Recent results have been so pathetic that they make Miller’s long-term record look like the work of an amateur."
Longleaf Partners - " Longleaf lost 64.8% in the 2007-09 bear market, compared with a 55.3% drop for the S&P index. Despite good performance since, the fund has lost an annualized 3% over the past five years and ranks in the bottom 10% among its peers for that period."

Bridgeway Aggressive Investors 1 - "The 2007-09 bear market was Bridgeway Aggressive’s Waterloo. It plunged 64.4%, 9.2 percentage points more than the S&P. Over the past five years, the fund lost an annualized 6.4%, an average of six percentage points per year worse than the S&P."

So these funds ruled the investment world, but in the last five years have tanked and now we should get out.  Thanks for that look in the rear-view mirror.  Might've been nice to have told us that BEFORE they crashed.

CGM Focus - "Over the past ten years, Focus returned an annualized 7.8%. That’s an average of 5.1 percentage points per year better than the S&P and good enough to place the fund in the top 1% among large-company-growth funds. He has beaten the market only twice in the past five years. Over that stretch, the fund lost an annualized 1.7%, including a 22.7% loss so far this year."

Fairholme Fund - "Over the past ten years, the fund returned an annualized 7.5%, an average of 4.8 points per year better than the S&P. But so far in 2011, it has tumbled 27.9%."

So if a manager underperforms significantly in one year dump him.  Apparently the recommendation here is to not think long term for your investments, but instead act on short term results.
In fairness, the author did say in 2010 he didn't like the direction manager Bruce Berkowitz was taking the Fairholme Fund.  But articles like this serve as reminders of the folly of active management and trying to beat the market.

The smart money still indexes.

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