McPaper on investing

By Doug Casey

I’ve sometimes been accused of being easily amused, but that has never extended to actually buying a copy of USA Today – unquestionably the worst paper in existence (with the possible exception of the Weekly World News that you’ll find near your grocer’s checkout counter). But, momentarily at loose ends in an airport lounge, I picked up the Oct. 4 edition of McPaper, which contained their 3rd-quarter stock mutual-fund report.

Ordinarily, this waste of time would not count as research, nor be discussed here. This, however, is worthy of note. Even if only for the same reason that I’ve often said the only investment advice you really need is to look at the covers of popular magazines every week, see what they’re excited about, and do the opposite.

A page of McPaper editorial went on to recap how horrible the market has been, and offered strategies for beating it – which was, literally, to buy funds that hadn’t done as badly as the norm. Of the 6,000+ funds on the USA Today screen, the 20 worst had declined from as much as 87.5 percent (Profunds Wireless) to as little as 51.8 percent (Fidelity Select Devlp Comm) over the last 12 months. What was much more interesting, and the reason I draw this to your attention, however, was the action of the 40 “Best Performing” funds.

Eighteen of the 40 on that list were gold funds, including the best performer (First Eagle SoGen Gold, up 82.4 percent). Nowhere was there even a mention of that in the editorial comment. Nor was the presence of three short-sale funds (including Prudent Bear Fund, which has been mentioned here any number of times).

I don’t know what one is to make of this, except that the writers think that the upsurge in gold, and the decline in the general markets, are anomalies that should be disregarded. And, to my way of thinking, that’s a powerful confirmation of the fact both of these trends have a long way to go.

A word on funds

As you know, I’m not a great fan of mutual funds, except as a lazy man’s alternative. Fees of one type and another are typically over 1 percent, and often closer to 2 percent; that loads the odds against you up front. But that’s not all. When funds get successful, they naturally grow in size. But the larger a fund is, the harder it is for it to buy stocks that can outperform the market – simply because large funds almost necessarily come to resemble the market. Can a great fund manager make a given fund worthwhile? Absolutely. But finding a consistent manager is almost as hard as picking a winning stock. And there aren’t 10,000 Warren Buffet or Peter Lynch clones out there.

The explosion of the fund industry during the bull market (from under 1,000 funds to close to 10,000 at the peak) proved nothing but that there was a mania going on. The fund industry as a whole can’t beat the market, because it is the market. Worse, as the market heads south (about $50 billion was withdrawn by investors in the last month), funds have to sell stocks to meet redemptions. The problem is that when they have to sell, only other funds are big enough to buy – and they’re selling too. And all the while fees are eating away at capital.