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The Daily Dow LEXINGTON, KY. (November 26) -- Excuses, excuses, excuses. It's no secret that The Motley Fool doesn't think much of the mutual fund industry. But the reasons why we hold funds in disdain are often distorted and I want to stick my own views into the fracas.
Mutual fund managers aren't stupid or incompetent, and I believe you'd be hard-pressed to find an instance where we've ever maintained they were. But that doesn't mean they can manage your money better than you can. The mutual fund industry survives because of terrific marketing and the retirement account regulations, which keep billions pouring into these over-capitalized and under-performing behemoths.
Let me make it plain -- I wouldn't want to have to manage a huge mutual fund either. How can a fund which must hold hundreds of stocks expect to beat the overall market? It's just not realistic. And as individual investors with other options, there's no reason to settle for mediocre (or much worse) performance and then pay a manager a fee to boot. Talk about adding insult to injury. But I do depart ways from the mutual fund apologists who claim that we shouldn't lump bond funds in with stock funds. Why not?
The only reason one would invest in a bond fund is that it represents a good alternative to a stock fund. So if bond funds perform less well, we should somehow excuse them? I don't think so! It might be different if these funds were somehow safer, even guaranteed not to lose capital. But they're not (remember 1994?). So for all intents and purposes, they're simply competitors to stock funds, and if they still can't beat the market over time, what good are they? I don't buy the special dispensation some argue we should afford them that they're "not supposed to beat the S&P 500." If they can't beat the market, why would anyone buy one in lieu of an S&P 500 Index fund? (I know, I know, the Wise mantra of diversity, another marketing tool to cover up lame performance.)
Over the last five years, according to Morningstar's rankings of the best mutual funds of any type, only a dozen or so funds out of the thousands they track managed to out-perform the Foolish Four, and most of them were sector funds which were at cyclical highs. Unfortunately, Morningstar only tracks the rankings for the last five years, so I'll issue a Foolish challenge.
If you have a database extending further back, compare the best of the best of mutual funds over 10, 15, and 20 years and see if ANY mutual fund can boast a return equal to or better than the Foolish Four returns we've recorded in the Fool's School area. (Be aware that our 1988 return for the Foolish Four is in need of a revision. We accidentally omitted a huge cash pay-out for the PPP stock that year, so the 1988 return is significantly understated.) If we can't count the number of funds that beat the Foolish Four on one hand for each period, I'll go the rest of the basketball season without once mentioning that the University of Kentucky is the reigning National Champion. (If you know anything about what Lexington thinks of its hometown basketball team, you know that what I'm proposing is one step away from heresy.)
Let me see your results or forever hold your... er... Dow stocks.
Today's Dow Numbers Stock Change Bid ------------------- DD + 1/2 94.88 CHV + 3/8 68.13 MMM -1 1/8 83.75 EK - 1/4 82.13 IMN - 3/4 30.75
Day Month Year History
FOOL-4 -0.00% 4.83% 32.61% 32.61%
DJIA -0.30% 8.28% 27.58% 27.58%
S&P 500 -0.14% 7.19% 22.73% 22.73%
NASDAQ +0.06% 4.89% 21.77% 21.77%
Rec'd # Security In At Now Change
1/2/96 142 DuPont 69.88 94.88 35.78%
1/2/96 149 3M 63.76 83.75 31.35%
1/2/96 380 Chevron 52.38 68.13 30.07%
1/2/96 148 E. Kodak 67.00 82.13 22.57%
7/16/96 14 Imation 26.16 30.75 17.56%
Rec'd # Security In At Value Change
1/2/96 380 Chevron 19902.50 25887.50 $5985.00
1/2/96 142 DuPont 9922.25 13472.25 $3550.00
1/2/96 149 3M 9500.09 12478.75 $2978.66
1/2/96 148 E. Kodak 9916.00 12154.50 $2238.50
7/16/96 14 Imation 366.21 430.50 $64.29
CASH $1883.65
TOTAL $66307.15
Transmitted: 11/26/96
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