Investing in stocks

[Justin]

You are constantly drilling the idea that most people make terrible investors so it makes me wonder if you're kicking ass or just hiding behind index funds and a copy of Random Walk.

Chuck Norris doesn't take random walks when investing in index funds.  He takes well-placed spin-kicks and steals that index fund's lunch money.

[Justin]

I sure hope that'll be funny in the morning when I'm not tired...

[Justin]

Oh, and just a quick note on the Munder fund and the SEC calculator.  Plugging the numbers in for an investment of $10K over 10 years at the current growth rate*, I get $28,403.80 or almost $3.5K more than an index fund.


Now, I fully expect that the Rabbster and I could sit here and dig up mutual funds that have performed well vs. ones that haven't in order to make our points.  Ultimately, though, that's just jerk-off fodder, because anyone can go back and look at a graph from the past ten years and come out looking like Mr. Smartguy. But that ultimately doesn't get us anywhere, because how something performed in the past isn't going to tell you how it will do in the future.

Also, I'll note that The Rabbi says that one should "buy books and study" but doesn't give any recommendations as to title or author.


*Of course, there is no  guarantee of this.  But then, if the fund were to drop below the standard growth rate for the S&P, it would be wise to sell it.

[Bogie]

Well, all I know is that my mutual fund guy has managed 20% in the past 16 months. Not too darn shabby. These guys do it for a living, and they've got several goals:

1) Don't lose the customer's money (important)
2) Make the customer money (if they don't, they tend to go hungry)
3) Keep it spread around, so that the activity will average out
 
You cannot adequately spread a small portfolio. I suspect that a next timing spot for major US terrorist activity will be when our market tops again. Remember 9/12 trading? We're still not back to 9/11.

[Bogie]

Duh... DO NOT put all your eggs in one basket. Research your funds, and if one isn't really performing well, switch to a different one.
 
Remember - Looking back at the past 10 years, you have some monster dips. Look for fund managers/groups that have managed to ride 'em out. My sister (who uses the guy I use) missed getting hit by the dot com dump, Enron, and 9/11... I like that...

[Justin]

Bogie, that's very well said.

[The Rabbi]

3) But what if one were to invest in, oh, I dunno, perhaps the Munder Small Cap

Well, I'll be damned.  12.5% return, and it beat the S&P 500 in what would be considered a short-term hold.

Justin, I do believe you could screw up a wet dream.

First,  I never said you advocated investing in Magellan.  Show me a post where I said you wrote that.  I picked Magellan because it is the largest, best known fund and one that was touted by the pros.
More to the point here, 12.5% on the Munder Small cap sounds pretty good.  And it did beat the S&P 500.  Unfortunately (for you) that 12.5% is for 2006 only, as your own data show.  Can you read a bar chart?  
Further, you have to compare a fund to its benchmark, not necessarily the S&P 500.  In this case the Munder Fund's benchmark is not S&P 500 but the Russell 2000 Value.  Had you bothered to read Munder's site you would have seen this.  You also would have seen that they admit they failed to beat the benchmark, even during the limited duration of 2006 (which isnt half over).
See here:http://www.munder.com/funds/commentarydetail/0,1319,MS0yNC0xLTEtMS00,00.html

Further, if you had bought the iShares Russell 2000 Value (an index fund) you would have been up 14.14% for YTD.  And the iShares have an expense ratio of .2% while Munder seems to charge over 5% for an upfront fee and I couldnt find their expense ratio otherwise, but I'll bet it is more than .2%.

You complain I dont name any books.  I have done so in plenty of posts.  But just to recap:
-Rich Dad/Poor Dad.  An easy book to start with
-A Random Walk Down Wall St.  A good book although I dont agree with what he says
-The Intelligent Investor by Ben Graham, Warren Buffett's teacher and a classic book
-What Works on Wall St.  A very good book if you skip the real technical parts.  I learned a lot here.
-Any book on Warren Buffett, the most succesful investor in history.
-12 Mistakes You Have To Avoid, by Jonathan Clements (I might have the title wrong).  A very good book by a WSJ columnist.
-The WAll St Journal.  Every day. Esp Jonathan Clements' columns
-The Economist

And i am sure there are plenty of others.  Some are good, some suck.  But you can learn something from all of them.

[Justin]

First,  I never said you advocated investing in Magellan.

If someone had followed your advice and thrown $10k at Magellan in '96 he would have today about $22,000.

I'm sorry, but saying "if someone had followed your advice and thrown $10K at Magellan" is tantamount to putting words in my mouth.

Munder charges a 1.3% expense ratio, and a 5.5% sales charge which is not unreasonable*, and has traditionally, over the long term, outperformed the Russell 2000 Value.  The question then becomes a matter of whether, in the long term, and including the fees, it has a higher return on investment than the Russell: 18.5% vs. 15.26% over five years.  Even including a 1.3% expense ratio that knocks it down to 17.2% it has still historically outperformed The Russell.  (I'm not sure that this would be a completely fair assertion to make, but I'm assuming it at least offers a rough guide.)

And hey, if the Munder drops below it's benchmark for any appreciable amount of time then you sell it.


*5.5% equates to $550 on a $10,000 investment.

[The Rabbi]

I can see the cause of the unclarity here.
"If someone had followed your advice" i.e. to invest in mutual funds.
"And thrown $10k into Magellan" which would have been following your general advice although the specific example is mine.

Anyway, for someone hung up on long term, the Munder Fund has only been open less than 10 years.  And over that time has beat the index by about 3%.  That isnt great given the 5.5% load (which you term "not unreasonable").  Further there are cap gains taxes to consider and the index will be much friendlier to that.
But hey, if you like actively managed funds then go for it.  I love when investors pour money into things like that.  I love when they trade hard assets for rapidly depreciating toys and turn their money over to some guy because they don't have time to learn about it.

[Justin]

How is 5.5% up front cost unreasonable, especially in light of the fact that the fund has a higher yield.

And over that time has beat the index by about 3%.

Yeah, just a lame little 3%.
Let me throw that into a compounding interest calculator here...

Current Principle: $9,450.00 (I'm being fair, and excluding the 5.5% they charge to get in the door.)
Annual Additions: 0 (For the sake of argument, we'll make it simple and just assume a single invested lump sum.)
Years to Grow: 20 (Arbitrary, but  on the side of longish-term.)
Interest Rate: 17.2% (18.5%-1.3%)

Future value: $225,935.28

Now, here are the numbers for the index:

Current Principle: $10,000.00 (I'm being fair, and excluding the 5.5% they charge to get in the door.)
Annual Additions: 0 (For the sake of argument, we'll make it simple and just assume a single invested lump sum.)
Years to Grow: 20 (Arbitrary, but  on the side of longish-term.)
Interest Rate: 15.26%

Future value: $171,227.02

The law of compounding interest speaks loud and clear to me.