August 28, 1998
Dear Wall Street Week:
I have been investing for 15 years and every since I started investing I continue to ask myself one question. Why do people continue to give their money to institutions that continue to show that they are anything but wise investors?
There are numerous facts to support the fact that the institutions aren't good investors:
1) Eighty-five percent of them can't beat a simple index. I say a simple index because anybody can setup a portfolio that tracks a certain index.
2) In the September 7 issue of Business Week magazine all equity mutual funds show a return of less than 3% when for the same period the S&P 500 is up over 20%. For the past four weeks all equity mutual funds show a loss of greater than 6% when for the same period the S&P 500 is only down a little more than 3%.
3) Numerous times a company will lose a large amount of its value in one day and the financial news media will report that "investors got burned." If you check out the institutional ownership of these companies you will find out that investors didn't get as burned as the institutions did. For example, on May 22, a news story came out, "Investors Burned, Manugistics (MANU) slides 40% Because of Threat from New Rivals." Investors didn't get burned as much as the institutions got burned, institutional investors owned 57% of Manugistics' stock. On June 3 Vesta Ins. Group lost 47% of its value because of an investigation about accounting irregularities. Was it the average investor that got burned on this which is what the financial news makes it look like? No, it was not the average investor, but the institutional investor, 91% of Vesta's stock is owned by institutions.
4) Many specialty funds which charge front end, back end, and large expenses can't even, on average, keep up with a corresponding index when you take in account all the expenses charged by the mutual fund company running the specialty fund. Take for example two funds I have owned this year: 1) Fidelity Select Energy Services and Fidelity Latin America. As an investor who sees Fidelity's advertisements and reads Fidelity's prospectuses on these two funds I am led to believe that Fidelity uses many different strategies to reduce the risk and enhance returns of their mutual funds including the ability to buy options and increase and decrease their exposure to stocks and bonds (even if it's an equity mutual fund) as determined by their extensive research department's analysis. They even have the ability to raise or lower their cash percentages (again even if it's an equity mutual fund) as they desire. They can increase or decrease the overall PE of the fund, many funds even have turnovers of greater than 200%.
With all this you would think they would consistently beat a corresponding index such as the OSX for Fidelity select Energy Services or the Latin American Index for Fidelity Latin America (They should beat their corresponding index as easily and by as much as the S&P 500 is beating their U.S. equity mutual funds). However, many of these specialty funds, with all their so-called sophisticated investing techniques, can't do it (beat a corresponding index).
I personally believe that the only reason for the so-called sophisticated investing BS put out by the institutions is to make investors think it's more complicated than it is and so they (the institutions) can charge more for their services. If this is not the case, then why, period after period, and year after year, are these funds having a hard enough time keeping up with a corresponding index that anybody could setup a portfolio to track?
Let's say I want to start a mutual fund called RS's Energy Services mutual fund. I put 60% of the funds assets in 10 of the largest capitalized stocks of the OSX, 25% in mid-cap stocks and 10% in small-cap stocks of the energy services sector which leaves 5% for cash. I move some of the assets around to make my customers think I am actually doing something, but I'm really keeping the vast majority of the fund's assets in the largest capitalized stocks of the OSX which is why my fund basically tracks the OSX. All I have to do then is just sit back and make a ton of money off of the relatively heavy expenses that I charge to run my so-called specialty fund.
5) And there's the recent report from Wall Street Week (8/21/98 airing). Here's some quotes from that show:
"When it comes to common sense and investing, small [small investors as compared to institutions] is beautiful." "Who really did do the panicking at the bottom?" "We found what we had long suspected. The real patsies, were the large institutional traders who's congenitally shaky nerves get so much sensationalized media attention. While the true smart money belonged to the much scorned little guys."
Rukeyser goes on to show that the little guys were the smart ones in October 1987 and October 1989 and he states that in October-November of 1997, "Just look how smart the much scorned small investor was during last Fall's scare of the year. While the big block trades of the horde institutions showed cumulative net selling close to that of their 1987 stampede, smaller trades produced a net total of more than $7 billion of ultra smart buying at the bottom. Could it be happening again?"
Rukeyser shows data for the past month and remarks, "As you see the cumulative total always shows heavy net sales by the crowd that has been so incorrectly hysterical in the past [the institutions]." "Now look at how the small investor, as measured by trades of fewer than 10,000 shares, has behaved in that period. It has been a case of much steadier nerves. Will the little guys be right again and the big guys once again end up will egg on their disdainful faces?"
Now to the reason I'm writing you. I need to go back to item (5) and pull out one of Rukeyser quotes, "We found what we had long suspected. The real patsies, were the large institutional traders who's congenitally shaky nerves get so much sensationalized media attention. While the true smart money belonged to the much scorned little guys."
You said you found what you had long suspected? "... the true smart money belonged to the much scorned little guys." "...smaller trades produced a net total of more than $7 billion of ultra smart buying at the bottom." That the institutions were, and I quote, "...incorrectly hysterical in the past." "The real patsies, were the large institutional traders who's congenitally shaky nerves..." And finally, "Will the little guys be right again and the big guys once again end up will egg on their disdainful faces?"
If you had suspected this and the research that you did proved it, why than do you continue to ask only these individuals, who have such a terrible track record, to be on your show? And choose not to interview the smaller investors who seem to know much more than the institutional investors you have on your show week after week?
I can understand with the general financial news media because they get their pay checks from the institutions, but Wall Street Week is aired on PBS, the Public Broadcasting System, which is for the people, and suppose to be in the public's best interest. I would think the public's best interest is to have the best investors on your show and not the worst ones even though they are the ones who draw most of the media's attention. Why don't you have some of the "best investors" (the small ones) on your show sometimes?
Also, rather you want to believe it or not, these large institutional investors are bad for the U.S. and bad for the global economy as a whole. The small investors are not the ones that drive up currencies and stock markets such as the Ruble and the Russian stock market, only to turned right around and sell them like a hot potato. This kind of investing by Wall Street and the institutions is causing severe problems in foreign markets and punishing foreign currencies and in turn the people that live there. If Wall Street can not invest based on fundamentals and prudence, than we need to do something about it, don't you agree?
Moreover, Wall Street and the institutions have basically quit investing in American small companies which are the backbone of the U.S. economy. Their excuse is that smaller companies are illiquid. Big companies can be just as illiquid as smaller ones when they put out negative news. Last Fall Oracle was one of the largest capitalized stocks on NASDAQ and when they reported that earnings were going to be below expectations the stock lost over 1/3 of its value in one day. Liquid? Yes, as long as you didn't care if you only got 66% of the price the day before.
To make matters worse, congress is actually thinking of giving the institutions more money through Social Security. Why would congress want to give the worst investors and the most irresponsible investors more money? And why, when it comes to my 403B, does the place I work say I can't buy individual stocks, but have to invest through a mutual fund company when, again, these companies are not only the worst investors, but the most irresponsible?
If Fidelity continues to hire individuals with liberal arts degrees only to make them a fund manager of a multi-million-dollar mutual fund, a few short years later, we will continue to, as you put it, "...do the panicking at the bottom," and be, "...incorrectly hysterical in the past." Can you imagine what the institutions are going to do the next time the U.S. goes into recession after acting the way the have in the past few months because of Japan which accounts for only 4% of our exports, because of the problems is Russia which accounts for such a small amount of our exports that it isn't even worth noting?
One last question which is kind of off the subject. I just bought a tent for $300 and a sleeping bag for $420. When I got home I found a label on both articles that said, "Made in China." If all the problems Americans are hearing about are true, and with the overwhelming strength in the dollar, why as consumers, are Americans not seeing this when they buy something at the store? If your answer is because the retailers are taking the extra profits and not passing them on to the consumers, I would then ask why is Fidelity Select Retailing not performing that well during the past six weeks? Is it because when it comes to the institutions they don't look at fundamentals, they just act like a bunch of sheep and do what everyone else on Wall Street is doing at the time?
Sincerely,