Mutual Fund Management – An Extreme Waste of Talent

By on September 15, 2006

Originally published in July 1998:

INDEXES ON 6/30/98

DJIA 8,952.02

S&P 500 1,133.84

NASDAQ 1,894.75

STOCKS ARE OVERPRICED! THEY ARE NOT GOOD BUYS RIGHT NOW! THIS IS A MANIA! Why have I turned into a shouting bear? The majority of stocks are not worth what the market is pricing them at. The historical average for PE ratios in the U.S. market is 14; we are around 25 now. Folks, these are peak earnings and profit growth is almost certainly going to slow from here for a number of reasons. The unemployment rate is the lowest it has been in years. Near full employment puts upward pressure on wages, resulting in a squeeze on profit margins. The Asian companies are exporting cheap goods and lots of them due to the collapse of their currencies (some currencies are 50 percent lower than a year ago). Many of these cheap products will compete with U.S. manufactured products. For more information on this crisis visit http://biz.yahoo.com/apf/980627/asia_crisi_2.html and http://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.html#intro.

But enough of all the ranting emotionalism….what is needed now can best be described as forced restraint. The restraint is provided by The Tactical Timing System which issued a buy signal at the markets close on June 19, 1998. My gut says we are going to get mauled by the bear, but the system is telling me to buy, albeit in a small incremental step. The wave of baby boomers are still in their peak spending and saving years, so who knows…..maybe we’ll see PE ratios at 35 before this comes to an end.

Mutual Fund Management – An Extreme Waste of Talent

There are more mutual funds than stocks on the New York Stock Exchange. It wasn’t always this way. Back in the 60’s you could miss the funds in the local newspaper, now it’s impossible not to find them since they take up several pages by themselves. At last count there were over 2,000 funds. There is absolutely no need for this many funds. People don’t need this many choices. An argument could be made for 500 funds, but thousands….give me a break! There are legions of analysts and managers earning megabucks running this colossally overblown industry. Most of these people are very smart and capable which makes it a shame that their talents are being wasted in an inefficient and unnecessary manner. The average fund is charging annual expenses approaching 1.5 percent. In other words, the public is gladly paying $15.00 for every $1,000.00 they have invested, per year, to have their money given mediocre treatment since most funds are nearly fully invested and haven’t come close to matching the market averages. The mutual fund industry is ripe for consolidation, but that won’t happen until there is a collapse. This is just one more example of excesses that are building and which will eventually lead this boom to a stunning bust.

Stocks Poised for a Fall

Andrew Smithers has written a good piece for Forbes Magazine about the overpriced market we’re experiencing. It can be found at http://www.forbes.com/forbes/98/0615/6112139a.htm

Wise Asset Allocation Can Make for a More Restful Night of Sleep

Mark Hulbert provides a thoughtful essay on the virtues of allocating your assets amongst the different investment classes at http://www.forbes.com/forbes/98/0615/6112140a.htm

Danger, Danger!

Another good Forbes article written by Carolyn T. Geer can be read at http://www.forbes.com/forbes/98/0615/6112180a.htm

Indexing Proponents Exposed

An interesting Fortune article about academics “the smart money” and their investments can be found at http://www.pathfinder.com/fortune/investor/1998/980706/dfa.html

Potential Internet Bonanza

A rosy view of the future for internet commerce is located at http://investor.msn.com/prospect/articles/inter/707.asp?ID=707

Portfolio Activity

The Tactical Timing System issued a buy signal on 6/19/98 (DJIA 8,712.87). The following were purchased on 6/22/98:

Aggressive Portfolio

Champion Enterprises (NYSE: CHB; 29 3/8)

Symbol Technologies (NYSE: SBL; 37 3/4)

Conservative Portfolio

Templeton China World Fund (NYSE: TCH; 6 7/16)

WEBS Malaysia (AMEX: EWM; 3 7/16)

Portfolio Updates

I’ve added a page which provides my views on the holdings in the “Real World” portfolios. It’s located at http://members.aol.com/stocksystm/holdings.htm

Recommended Allocations

Aggressive portfolios: 75% equities, 25% cash.

Conservative portfolios: 55% equities, 45% cash.

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