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Issue # 27 November 2000$6
per issue Annual Subscription $72 If the people don’t want to
come out to the park, nobody’s going to stop them. Yogi Berra Recommended
Funds Performance-Prices for week ending Nov 24, 2000
DJ Industrials: -
7.88 % S & P 500 - 6.10 %
Nasdaq Comp – 19.44 % Russell 2000
- 4.93 % MCSI EAFE (Foreign
stocks) – 15.44 % “I do not believe
that selling at very low prices is a remedy for
having failed to sell at high ones.” John Maynard Keynes The question is, of course,
how low is low? A year ago, I bannered
my commentary with “Stealth Bear Market, ” referencing Wall Street Journal statistics
showing that 62.4% of the stocks on the New York Stock Exchange were down for
the year when we were supposedly still in a roaring bull market. And it’s been pretty much down hill from
there – to mix metaphors, the bear is out of his closet. How bad can the Nasdaq get? The decline is already an official bear
market, down 35% in six months.
Historically, major bear markets have lasted 18 months on average. So if this one fits the pattern – and
continues to drop at the current rate – it will be down to zero a year from now
and we won’t have anything left to fret about. At times like this, one strives
to keep body and soul and one’s head on straight. Realized gains taken earlier this year, along with funds still
held, have put NFF subscribers ahead of the game this year. None of the holdings remaining are real
stinkers. Oppenheimer Main Street Small
Cap and MFS Technology – particularly because it is a technology fund – are
turning in stalwart results. Although it’s purely anecdotal, the folks who are
suffering the most are not fund investors, but stock investors who seem to have
been – compared to fund investors –even more prone to performance chasing. Although I focus on funds in managed
accounts, friends and acquaintances who invest in stocks are eager to share
their woes – and from what they tell me, they all seem to have been in the
“same” stocks – the most often-mentioned names:
Approximate
Decline From 12-month High Lucent Technologies - 76 % Microsoft - 66 % American Telephone - 43 % Intel - 37 % Qualcomm - 63 % Cisco Systems - 37 % Although they’re eager to share the names of their
stocks, not so with prices they paid for them.
It’s not surprising that Lucent keeps coming up – it’s the most widely
owned stock in the U.S. behind Metropolitan Life, according to InvestmentNews,
(I’ve never had anyone tell me they owned Metropolitan Life). My sense is that prices paid were closer to
the highs than where their stocks sulk now.
What a shellacking investors have taken from some of the biggest and
“best” companies in America – the kind they and other mainstream investors feel
comfortable owning. From the highs,
they are down on average, more than 50%.
I’m also guessing that they are typical stock investors, owning no more
than six stocks. Further, I’ll bet most
of their undiversified stock accounts are invested in the same kind of stocks:
large-cap, (former) growth companies, that led the hit parade and drove the S
& P 500 Index to its startling string of gains – and valuations - the last
five years. . From what they tell me, some of the money they put
into their stocks came from winnings from previous holdings, so they assure me
that they’re “still all right.”
However, if we’re in a major bear market, the problem is that, “still
all right” is not the stuff from which final bottoms are made. “Never again,” is what I’d prefer
hearing. “Lesson Learned
and Unlearned”
Speaking of “again,” if each market cycle wasn’t
different from the previous one, we could simply leaf through the history
books, apply the lesson learned, and nobody would ever have to work again. The Wall Street Journal’s Karen Hube wrote a “Your
Money Matters” column last December that speaks to the shift in the investment
winds we are experiencing. She quoted Harold Evensky, arguably the most
well known financial planner in the country: ‘“Unfortunately, the 90s have taught investors some bad lessons. Thanks to the phenomenal returns of U.S.
large-capitalization stocks, many people now believe that stocks only go up,
diversification makes no sense and they should buy individual stocks instead of
funds.’” Since Evensky is essentially
in the fund business, his comments are probably salted with a touch of bias,
but they are still well-taken, considering this year’s experience. The column included a table showing “some typical
investment habits over the past two decades.” Lessons Learned
and Unlearned
The ‘80s The ‘90s Buy stock funds Buy individual
stocks Think
Globally Invest
domestically Small
is beautiful Bigger
is better Bonds
add balance Bonds
are for wimps Buy
and hold Trade
actively Just when you think you’ve learned the game,
somebody changes the rules. A conclusion is the place
where you get tired of thinking. Martin
Fisher Even though I recommended sale of
Longleaf International because it had passed the 18-month mark (52.2% gain), I
continue to have high regard for Mason Hawkins and his colleagues at
Southeaster Asset Management. I always
read their plain-English, candid shareholder reports with interest and the
latest is no exception. Their third
quarter report was written on the 25th anniversary of their
founding. Until recently, when their
relative performance has soared, Longleaf has been marooned at the wrong end of
the investment style spectrum. Their
results (versus the S & P 500) were so bad for a couple of years that Money’s
Jason Zweig wrote a recent column defending his previous labeling of
Hawkins as “the Warren Buffett of mutual fund investing,” in 1998. What caught my eye: “In 1975 we were coming out of one of the worst and
longest bear markets in history. Fear
was abundant (especially as measured by the looks of disbelief and pity we got
when we told family and friends that it was an opportune time to start an
investment management firm). The bear
market had not only taken much excess out of the overpriced “Nifty Fifty,”…but
the fear had left many exceptional businesses selling for less than half their
worth. The S&P 500 had fallen from
a P/E ratio of 18.4 times trailing earnings at year-end 1972 to 7.7 times two
years later.” The eye-catcher was the comparisons between
valuations then and now. Before
the steepest market drop since the 1929 crash, the S& P was selling at 18.4
times earnings – after the drop, at 7.7 times. Today, after the bruising drop some sectors have already taken,
how do valuations compare to 25 years ago?
The S & P 500 is selling at approximately 37 times earnings. There is no investment topic that people stopped talking about faster
than new era economics that justified today’s much higher valuations – and
that’s understandable. But I’d hate to
go back to the old era for obvious reasons – you can do the math. If we do, convertible bond funds – that I’ve
recommended from an asset allocation standpoint - should provide considerable
downside protection. If the new era is
here to stay, they will still provide decent returns, and importantly, some
peace of mind. And that’s got to be
worth something. “A fanatic is one
who sticks to his guns whether they are loaded or not.”
Franklin P. Jones Ralph Wanger, one of the
deans of the mutual fund business, recently sold his Acorn Funds management
company to Liberty Financial of Boston.
I’ve used his funds in managed accounts for years and I’ll be sorry to
see him winding down (he’s promised to stay for five years). Sporting a wonderfully bad attitude, he
could usually be counted on to provide good investment results and acerbic
remarks. In commenting on why he sold
his company, “In five years I’ll be 70, and by then it’s about time to turn it
over to people who know what the hell’s going on. It’s bad enough to work for a company run by an old fart if
you’re not the old fart.” One result of the sale is that
buyer Liberty is converting Acorn to load funds, a trend that seems to be
gaining momentum in recent years. The
mutual fund business is maturing and it’s coping with overcapacity – who needs
over 11,000 funds (tracked by Morningstar) and however many thousands of annuity-wrapped
funds there are in addition? Loaded Acorn funds is quite a
change. In his book, A Zebra in Lion
Country (Simon & Schuster, 1997), Wanger said “I’m a believer in no-load funds, by the way, and not just
because my funds are no-loads. Most obviously,
a no-load fund delivers a more economically effective package. All of the customer’s money goes into
investments instead of Mercedes-Benzes for the salesmen. But beyond that, the
no-load investor has to do his or her own research rather than rely on a broker
and that’s a healthy exercise. Someone
who has gone to the trouble of collecting and studying prospectuses and then
made a careful decision about which funds to be in has convinced himself of the
fitness of those funds for himself.” But market realities tend to
interfere with idealism, and it’s not surprising that Wanger took his $280
million and another $170 million contingent upon achieving certain goals over
the next five years. The reality is that most funds are treading water or losing
assets. Investors have been gravitating
to individually managed accounts (IMAs), buying more individual stocks and
until recently, funneling most of their money into a few handfuls of large-cap
growth stock funds. In the first
quarter of 1999, 96% of all new money flowed into only 25 funds – almost all,
large cap growth stock funds. In the
first quarter of this year, Janus scooped up $28 billion – the largest
quarterly net sales increase of any fund company ever. More recently, as
large-cap growth stocks have turned soft and brown, 11 of its 14 funds are
lagging their peers, so investors have begun yanking money back out. Investors don’t buy funds any more – or even
lease them – they’re on a month-to-month and it’s playing hell with the
economics of the mutual fund business. One fix, many in the industry
have decided, is to pay salespeople commissions to schlep their funds. That may be marginally helpful, but the
larger problem is that there are just too many funds. Most cost more than they deliver – in terms of returns. They have created scads of fund management
multi-millionaires, so it’s hard to shed salty tears for the industry’s
dilemma. Reducing fees – instead of tacking
on sales loads – would seem to be another option, but few are interested. As Rex Sinquefeld of DFA Advisors observed a
few years ago, “Mediocrity doesn’t come cheap.” __________________________________________ |
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