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The Daily Dow LEXINGTON, Kentucky (December 24) -- In the past I've been flamed a time or two (sometimes directly, sometimes obliquely) for my sweeping generalizations about the relative weakness of mutual funds as investments when compared to buying individual stocks. But the numbers continually bear out my generalizations. The simple Dow approach continues to destroy the record of mutual funds over the long haul. According to Morningstar, as of the end of November, 80% of all stock funds are losing to the S&P 500 this year. That's just the equity funds, mind you. I'm not even including the bond and money market funds which do even poorer over time than equities. That's right. Eight out of ten of those highly marketed, expensively staffed, professionally managed funds haven't kept pace with the simple index representing the whole market. One year can be a fluke, though, so let's get to a more relevant comparison. How have funds done over a longer period versus one of our Dow variants, the Unemotional Value 4+? The print version of Morningstar lists the best funds of any kind over the last ten years (the longest period they include), and out of the thousands with a ten-year record, care to guess how many of them out-performed the UV4+? Nine ... out of thousands. In other words, less than half of 1% of all mutual funds have been able to keep pace with a method a 7th-grader could implement in fifteen or twenty minutes a year. (Over the last decade, UV4+ has averaged 20.5%, about 3 percentage points lower than its longer-term average. The best mutual fund over the last decade -- the Seligman Communications and Information Fund 'A' -- has averaged 22.7%.) So, it's possible to find a fund that's outperformed the Dow Approach, but the real question is how many investors can tell you which nine funds or so will beat it over the next ten years? And if one invests, as most mutual fund investors do, in several funds at a time, the odds of beating the Dow Approach diminish even further. So let the skeptics have their say. Then pull out the numbers and do the math yourself. In the long run, a model you know you can use that beats 99.5% of all mutual funds over a decade makes more sense to me than defending a tired and bloated industry which doesn't have customer returns as its primary objective. (If mutual funds were concerned primarily with returns, they couldn't possibly let their assets under management get as large as they do. I'd love to see a fund cap its size at a relatively small level and then prove that it can beat the pants off the market, but the compensation structure works off of assets under management rather than performance, so it's in the funds' best interests to be big rather than profitable.) So, put in your 15 or 20 minutes of work this year and then enjoy life -- what a glorious gift that is. Happy holidays, Fools! (Don't forget the Thoroughbred Stock Challenge. Join the fun and get your entry in by the opening bell on January 2.) Today's Dow Numbers Stock Change Bid ------------------- DD --- 95.75 CHV - 1/2 65.50 MMM + 1/4 84.75 EK + 1/4 80.88 IMN + 1/4 30.13
Day Month Year History
FOOL-4 -0.17% 3.47% 30.90% 30.90%
DJIA +0.52% 0.02% 27.47% 27.47%
S&P 500 +0.55% -0.95% 21.93% 21.93%
NASDAQ +0.63% -0.39% 22.38% 22.38%
Rec'd # Security In At Now Change
1/2/96 142 DuPont 69.88 95.75 37.03%
1/2/96 149 3M 63.76 84.75 32.92%
1/2/96 380 Chevron 52.38 65.50 25.06%
1/2/96 148 E. Kodak 67.00 80.88 20.71%
7/16/96 14 Imation 26.16 30.13 15.17%
Rec'd # Security In At Value Change
1/2/96 380 Chevron 19902.50 24890.00 $4987.50
1/2/96 142 DuPont 9922.25 13596.50 $3674.25
1/2/96 149 3M 9500.09 12627.75 $3127.66
1/2/96 148 E. Kodak 9916.00 11969.50 $2053.50
7/16/96 14 Imation 366.21 421.75 $55.54
CASH $1942.85
TOTAL $65448.35
Transmitted: 12/24/96
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