Monday Nov 13, 2006

Mutual funds are a sucker's bet

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Mutual funds are a sucker’s bet

by Ian L. Cooper, EVS

The only reason to invest in a mutual fund is to get a match from your company or a tax break from the government.  That means the only reason you should buy a mutual fund is for your 401k.

You’ll notice you can’t buy single stocks for a 401k.  They are a de facto monopoly for the investment industry -- quite a coup for the lobbying group that pushed that one through.

You won’t hear any complaints from the general public, however.  Those few of us who are savvy and bold enough to actually buy stocks instead of falling into the force-fed crap trap that is the mutual fund machine don’t have nearly the voice of the politicians coupled with well-established investment companies.

It might surprise you that I believe that the mutual fund industry is a scam.  It shouldn’t.  A cursory glance at your quarterly statement should clue you into the Byzantine ossification employed by mutual fund folks.

The simple truth is that mutual funds hide their fees.  They lack transparency on buys and sells, and they only go up 10% a year -- when they aren’t’ falling 10%.

Financial writer Robert Kiyosaki, author of Rich Dad, Poor Dad, recently gave an example, which I took some liberties with.  First of all, when you buy a mutual fund you pay fees every year.  When you buy a stock you pay a fee once -- and that’s usually around $10.  When a financial planner tells you to invest in the long haul, it’s because he will make more money.

Here is an example: If a 20-year-old invests $1,000 and leaves it alone for 45 years until retirement, at 8% it will grow to $140,000.  If a mutual fund company takes 2.5% out of that return -- which is standard -- that $1,000 will only grow to $30,000.

In other words, the mutual fund industry puts up zero money, takes zero risks and makes 80% of the profit.  You put up 100% of the money, take 100% of the risk and make 20% of the gains.

However, there is a way you can make the same amount of money is a tenth of the time.  You take 100% of the risks, you put up 100% of the money, but your return is tenfold in one-tenth the time…

Making money in the market is easy…

Take a look at this chart.  If you had started with $2,000 in June of 2003 and invested $1,000 in EVS’s advice you would have made $39,203.85.  Meanwhile, $1,000 invested in the market standard, the SP500, would have returned $1,567.22.

We aren’t playing any games here.  We used the time-tested Wall Street standard “dollar in, dollar out” method.

Not only are we that good, but they are that bad.  The goal of mutual fund managers is to keep their jobs.  If they beat the SP500 by a point or two, they win and get to harvest another 2.5% of your hard-earned money, year in and year out.

It’s about time we all said no to the institutional scam of mutual funds.

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When the chips are down

by Steven Lord, Trend Investor

There is a guy in my town that religiously watches Jim “The Shrill” Cramer on CNBC, and then buys whatever stock he is plugging at the open the next day. He is hoping to squeeze a half-point out of the position and sell it before the market closes. He knows nothing about the stocks being traded -- he is only after a small move hopefully generated by Cramer’s tout show. Lately, the expected movements haven’t occurred, and he is invariably losing money. I haven’t had the heart to tell him that pre-market trading has usually priced Cramer’s “work” before regular trading begins, and that so many people now watch the show that he is “ahead” of exactly no one. However, it worked often enough in the past that whenever I see him, he spares no effort in telling me all about his investing prowess.

Interestingly, his portfolio, in total, is only marginally ahead of where it was three years ago -- roughly the return on a 10-year T-bond. It seems the only person getting rich from this guy’s “strategy” is his stockbroker.

I am exactly the opposite type of investor. I am the type who likes to be a strategic half-step ahead of the crowd, into a stock or sector before the Jim Cramers of the world hawk it to the masses. I know a lot of people make money from momentum investing (also known, in some circles, as the Greater Fool Theory) but for me, nothing is better than finding a stock or sector that is out of favor with Wall Street, figuring out that it has a decent chance of returning to grace, and then waiting. It isn’t rocket science, but it is one of the most consistent ways of making money in the market that I have found. And I mean portfolio-changing money, not a half-point on 100 shares here and there.

Lately, my thoughts have turned to one sector literally abandoned by Wall Street in recent months: chip stocks. Largely due to fears of an economic slowdown that will depress demand for all the various electronic gadgets we have come to love, chip stocks have had a tough go of it even in the face of a record-setting Dow run. Meanwhile, inventory levels, particularly at Asian chip suppliers, are high, traditionally a poor omen for chip stocks. Worse, the numbers coming from chip stocks themselves have been dismal this quarter.

So the news is bleak, the future is bleak and there doesn’t seem to be a reason in the world to buy chip stocks. Right? Wrong. Now may be the perfect time to look at them. Consumer spending is showing remarkable resilience in the face of a slowing economy and a busted housing bubble, and retailers have been posting decent numbers. Moreover, electronics will again be the No. 1 holiday product, meaning a lot of the inventory overhang will likely be absorbed within the first quarter of next year. And don’t forget those 1 billion cell phones that are expected to sell worldwide in 2007…

Best of all, chip stocks have stopped underperforming the broader market, even though the earnings news in the sector has been abysmal. This is one of the cardinal signals that a stock or sector is “washed out.” The bad news is priced -- everyone who was going to sell the chip stocks in anticipation of a slowing economy has already done so. This makes the sector extremely ripe for a bottoming process over the next several months

Downside risks still remain, and chip stocks could easily suffer additional weakness this quarter. Moreover, individual stock selection is going to be important in playing any rebound, since not all chip stocks are created equal and some will perform better in an upturn than others. But it is increasingly clear that chip stocks are bottoming, and we want to be in the stocks already when Wall Street finally stops valuing them through the rear-view window. Remember, it is always darkest before dawn…

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Earnings Announcements

Abercrombie & Fitch Company, American Eagle Outfitters Inc, BJ’s Wholesale Club, Fossil Inc, Home Depot Inc, Medifast Inc, Pilgrim’s Pride, School Specialty, Staples Inc, and Wal-Mart Stores Inc are releasing earnings.

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Unlock Dates for November 2006

11/13/06 – Restore Medical is unlocking 4 million shares.
11/14/06 – Burger King is unlocking 25 million shares.
11/21/06 – Mastercard is unlocking 61.5 million shares.
11/29/06 – Luna Innovations Inc is unlocking 3.5 million shares.

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Upgrades and Downgrades

Hansen Natural upgraded by Canaccord Adams from Hold to Buy.

Express Scripts upgraded by JP Morgan from Neutral to Overweight.

Cabot Oil & Gas upgraded by KeyBanc Capital from Buy to Aggressive Buy.

Blackboard upgraded by Banc of America from Neutral to Buy.

Barrick Gold downgraded by Canaccord Adams from Buy to Hold.

Pep Boys downgraded by Kevin Dann from Buy to Hold.

Skyworks downgraded by Thomas Weisel from Outperform to Peer Perform.

Janco Partners initiated a Market Perform rating on Level 3.

Brean Murray initiated a Buy on Shuffle Master.

Citigroup initiated a Buy on FedEx.

Citigroup initiated a Buy on UPS.

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