Edward C. Johnson Fidelity Investments
PO Box 9015
Boston, MA 02205-9015

Dear Mr. Johnson:

I just received the booklet that details the holdings of your sector funds. I was disappointed in seeing that you still continue to hold stocks that have ridiculous valuations, e.g., Ebay, a stock that has a price to revenue of 20. Historically, even the best growth stocks only command a price to revenue of around 6.

You may ask what business is it of mine to question you about the stocks your fund managers buy? I believe what makes it my business is not only the fact that I'm a customer, but moreover, that my employer forces me to invest for my retirement through an institution. That is, I am given no choice. I am not allowed to setup my own portfolio, but I am required to invest only through a mutual fund company.

Stanford is offering a new retirement program for its union employees, and again, employees are forced to buy only the investments provided by a mutual fund company. We are even told we should be grateful, "Fidelity has around 200 funds to select from and many other company retirement plans only offer a few mutual funds to select from."

When I wrote you, my employer, and my congressman about this issue before, for all intents and purposes, I was told it's the law and since most Americans do not have the ability to setup a portfolio of stocks, it's in the best interest to all. From what I have seen, I still feel it's in the best interest to all to give people the chance to make their own investment choices if they so desire.

Bad stock picks have burned Fidelity's so-called experts just as much as bad picks have burned the novice investor. Fidelity and their analysts were holding the Enrons and WorldComs and getting burned just like everyone else. Fidelity's tech stock mutual funds were holding dot coms and getting burned just like everyone else. There was no advantage for a novice investor to be holding Enron, WorldCom, or a dot com stock via a stock mutual fund or in a diversified individual account.

One could even argue that most stock mutual funds are over diversified. That is, for a portfolio of stocks to eliminate "firm risk" it is only necessary to hold 20 stocks, and holding 10,000 stocks won't get rid of any "market risk." Why is it that most stock mutual funds hold over 30 stocks when firm risk can be eliminated with 20, and holding more than 20 only means more maintenance cost, a cost that shareholders must pay? Because the mutual fund business is so popular due to favorable tax laws that mutual funds are forced to hold a larger number of stocks to handle the growing asset bases of mutual funds in general (there are now more mutual funds than stocks listed on the three big exchanges).

I have been a Fidelity shareholder for 15 years and many times I have tried to find a true advantage for using a mutual fund, but I never can come up with an answer. And by true advantage I mean one that produces better returns. When it comes to investing, all that matters is return, return, and return.

The most important investment decision for a long-term retirement plan is asset allocation, not individual stock selection. The fact is, Fidelity's customers are still making the most important decision: how much do I put into stocks, bonds, and cash, and of the amount I put into stocks and bonds, exactly what group do I invest in. That is, of the 30% I'm putting into stocks, how much should I put into large cap, small cap, tech, growth, or value? Granted, Fidelity can give their two-cent opinion, but their opinion does not guarantee any specific return. I say two cent, because no one, including Fidelity, knows where stocks or bonds, or any other investment is going in the next year, let alone the next 10 years or more.

Again, customers of mutual funds gain nothing, the most important decision and the one that really matters over the long-term; they are making on their own. And the only thing Fidelity offers is their opinion (on asset allocation), which is simply that, an opinion, nothing guaranteed.

I have attended classes on retirement planning at work. Mutual fund companies including Fidelity will give presentations. After the classes, I will ask students what they think they get from a mutual fund company? The answer is always simply, "professional management." When I ask them if it was made clear to them that the most important decision is asset allocation and that when it comes to asset allocation, they're the one who makes the decision and they're the one responsible? They always answer no, that they believed the mutual fund company was making the hardest decisions. I always remark back to them the mutual fund company only gives an opinion and is not responsible at all for producing any given return.

As far as setting up a portfolio of tech stocks (or any other portfolio of stocks), that's the easy part, especially if you do it the way Fidelity does it, which is bigger is simply better. That is, virtually every sector fund run by Fidelity has, 40%, 50% of the fund's assets in the largest cap stocks within the sector.

Anytime you buy stocks you can lose money and you can lose money through a mutual fund just as easy as you can from setting up your own portfolio. For example, if you had used a mutual fund to buy tech stocks two years ago vice setting up your own portfolio, you would have still lost 50%, 60%, or more if you had owned any of Fidelity's tech sector funds. Again, Fidelity's so-called professionals or experts got just as burned as any small investor. Am I saying they can't make mistakes just like everyone else, No. What I am saying is that since they make mistakes like everyone else and lose money like everyone else (granted, it's not their money they're losing), that retirement savers like myself, should be given the chance to make our own stock selections.

It amazes me why the Wall Street Journal, CNBC, and Congress are all asking about the mistakes made by Wall Street firms like Merrill Lynch and analysts, but no one is asking about the mistakes made by mutual funds and their analysts. And these are institutions that investors such as myself are required by law and, or our employers to patronize.

You can't watch CNBC without seeing an advertisement from Fidelity. However, when you want CNBC to ask questions to the fund managers of Fidelity regarding their losses in stocks such as Cisco ($400 billion has been lost in market cap in this one stock in the past 2 years, in the 1987 Crash, the total market cap lost in the entire U.S. was $500 billion), WorldCom, or Enron, to name a few, the questions are not asked and the managers are no where to be found. These are the same people who are complaining about Enron not "fully disclosing." CNBC is the most watched TV channel when it comes to investing, and Fidelity is the largest mutual fund company in the world with assets under management of one trillion dollars, and CNBC ignores them like they don't exist (except when they're looking for advertising revenue).

In 1936 a new program called Social Security was founded; a 2% tax for a partial retirement. Then a World War that caused a baby boom that would make Social Security look as good as American apple pie. And it may have been, unfortunately, the politicians spent all the SS surpluses and in the Eighties they would realize there was trouble...and there was going to be big trouble when the boomers retired. The government had to do something.

Some things they did: raised retirement ages from 65 to 67, raised Social Security taxes, reduced benefits, and started IRA and 401k programs.

The quick fix would look like a good one: those IRA and 401k plans would cause heavy investment in the stock market via mutual funds. Since the government was already taking 15% of a worker's pay for SS taxes (of course not reminding the worker that SS taxes were originally only 2% and that's why it was only a partial retirement), the only place the worker could turn to get the returns necessary for a decent retirement was the stock market. Earnings supported some of the rise in the stock market, but most of the returns were simply based on valuation, that is, investors were now willing to pay more in the terms of price to book, price to earnings, and price to revenues than before.

With the government already taking 15% for a retirement plan that they claimed was only a partial, workers had to turn to the stock market; they only had a little left over to invest and they needed big returns to make a nest egg by 65. Also, the stock market was the place that the boomer's parents were scared of, the boomers themselves had never been through the crash of "29" or the Great Depression...not to worry, the government had tons of programs now, and there would never be another Great Depression.

I say the quick fix looked good because now with double-digit returns of the stock market everyone, especially the government could be saved. But wait, we have a Federal Reserve and the Federal Reserve's feelings are that too much economic growth and stock market growth may be good in the short-term, but not for the long-term due to inflation. Low and behold, the Fed aggressively raises interest rates in 1999 and early 2000. Sure enough, about a year later (there is a time lag for the interest rate hikes to be felt by the economy) the National Bureau of Economic Research stated the U.S. Economy had fallen into recession (6 months before 9/11).

The Dow is now down 20% for the past three years. To make matters even worse the National Debt continues to grow (just this week the Senate passed a bill to extend the debt ceiling from $5.95 trillion to $6.4 trillion) and time continues to tick away, that is, the boomers are getting closer and closer to retirement with SS surpluses no longer existing by year 2015.

With the new retirement program for union employees here at Stanford, members were sent an individual comparison chart. The chart compares the new contributory plan to the old defined benefit plan. The chart has two examples for the new contributory plan: one assumes a 5% growth rate and one assumes a 10% growth rate.

Even though these return rates make the plan look good, I believe over the long-term they are going to prove to be bad estimates. Granted, the stock market returns of the 20th century were around 12%, but the 21st Century is not the 20th Century. That is, it's only been the last 20 years or so that the Fed has been borrowing money like crazy (current cost to service the debt is $366 billion and that's with interest rates at 40 year lows) and during the whole 20th Century those on Social Security were a small number when compared to those supporting them. The 21st Century will be the complete opposite. Making statements that stocks have performed well over the long-term in the past, and therefore will perform equally well over the long-term in the future I believe are not valid.

One final thought, I was wondering if you're concerned at all about stock options? CEOs were justifying the ridiculous compensation paid to them by stating, "pay for performance." However, for the past 2 years I have seen in the "Notice of Annual Shareholders Meeting Report," of the individual stocks I owned that CEO and even some employees stock option plans have simply reset strike prices to a lower value. That is, compensation boards are continuing to reward CEOs with huge stock option cash rewards even when the company's stock is losing a very high percentage of its value. In a country where 20% of the children live in poverty conditions, do you really think a CEO should make millions of dollars off stock options even when the company's stock is losing a large amount of market cap?

One thing I have to give you credit for is you have created one of the best jobs in the world: the mutual fund manager. When the indexes are up and therefore their mutual funds are up, they get bonuses, however, when the indexes are down and therefore their mutual funds are down, they may still get bonuses. And from what I have seen, they are not accountable to the customers at all: I have written several Fidelity fund managers and have never received a reply from them. I have even heard that there are times when volume levels are low on the exchanges and people will remark that the fund managers are vacationing, it amazes me that fund managers don't need to have replacements for them when they go on vacations. Unlike being a politician, fund managers have got it made.

If any of my statements are inaccurate, e.g., if asset allocation is not the most important issue for a retirement saver, if mutual funds do guarantee a certain return, or your tech sector funds did not lose 50% or more for the last two years, or maybe you sold all your Enron and WorldCom when they were still above $50, please let me know. Like I said, most of the information provided about what stocks are in a mutual fund is old and outdated by the time the shareholders get the information from the fund company. Also, if you do have some tech sector funds that don't hold what I consider junk, that is, stocks that have price to revenues of over 10 and PEs over 50, please let me know.

I believe that since 15% of my pay is already going into a retirement plan that many feel will not be there for me when I retire, I should, at the very least be able to invest any money that I have in other retirement plans the way I want to, and that means buying the stocks that I feel will perform the best, that does not include stocks that have huge valuations, ones that I constantly see in the portfolios managed by mutual fund companies.

I am going to end with a couple of quotes, the first one is from Wall Street Week (PBS) on April 30, 1999: Rukeyser asks John C. Bogle, Sr. Chairman, The Vanguard Group,

"What do you think when you see a TV commercial in which Peter Lynch talks with Don Rickles." Bogle replies, "Well, my first thought is who's paying for this and it's of course the shareholders of those funds which does raise interesting questions about whether this industry is, has moved from a traditional focus on management to a whole new business, a business of marketing and if it's any big concern I have about the mutual fund industry today, it's turned its back on trusteeship, fiduciary duty and management [you notice how he did not use the term investing], and turned its face toward or its emphasis on, marketing, bringing in large assets to earn large fees and I don't think that's the right thing to do for the investor."

"BOSTON (Reuters) - Fidelity Investments, the world's largest mutual fund company, said on Thursday its profits more than doubled to $2.17 billion in 2000, as strong performances at its fund supermarket and brokerage arms offset weak sales of Fidelity funds and market declines."

"Revenues for the year were $11.096 billion compared to $8.845 billion in 1999 and assets under management at year end dropped to $919.8 billion from $955.1 billion, reflecting declines in the stock market. In 1999, Fidelity earned $1.008 billion in net income. While the profit figure was 115 percent higher than in 1999, the performance of Fidelity's funds was less than stellar."

ADDENDUM (June 26, 2002)

Here's Fidelity's response to my letter to them. Remember all the questions I asked them when you read their response. Fidelity clearly feels they owe me no answers, even though I'm a customer, it means very little to Fidelity. Fidelity also seems to have no concern for the fact that I sent a copy of my letter to my congressman. It seems one of the least effective tools I have against big business is my congressman. And, oh, by the way, he's a Democrat. It amazes me how everyone thinks the only politicians who support big business are Republicans.

"I am writing to you in regard to your letter to Edward C. Johnson 3d, dated June 14, 2002, concerning the investment options available to you through your Stanford University retirement account. Mr. Johnson received your comments and has asked us to respond to your inquiry. Thank you for the opportunity to address this issue with you.

Please accept this letter as confirmation that your Stanford University retirement account is a 403(b) plan and does not allow for the purchase of individual stocks. For your review, I have enclosed a copy of Internal Revenue Service (IRS) publication 571. Please note on page 3, the types of accounts that can be offered in a 403(b) and the investment options available.

In addition, your account with Stanford University is subject to the Employee Retirement Income Security Act (ERISA), which permits the offering of mutual funds as an investment option for 403(b)(7) accounts. ERISA, however, does not allow for the purchase of individual stocks in 403(b)(7) accounts.

Mr. Strozinsky, thank you for taking the time to write us. If you have any questions, please call a Retirement Services Specialist toll-free at 800-343-0860 or for the hearing impaired (TTY) contact 800-259-9743, Monday through Friday, 8 a.m. - midnight, Eastern time, and refer to the reference number noted above."

Sincerely,

Russell Wiswell
Priority Services Specialist
Fidelity Investments Institutional Operations Company (FIIOC)