A Nice Magic Trick: Mutual Funds

I don’t like mutual funds. Not because of the excessive fees and not because 95% (or more) underperform the market. I don’t like or invest in mutual funds mainly because I don’t have the temperament for them and I can’t stand their sleight of hand.

No Patience

First some background. My current investment assets are ALL tied up in my 401k account and since I can’t take that money out till I’m 60, it forces me to think for the long term. I also only invest in individual stocks on my 401k plan (If you have this option on your plan, you should really take advantage of it). No mutual funds for me. I have no patience for them.

It may seem contradictory that a supposedly value based investor has no patience, but I find my patience levels for stocks and mutual funds are on completely different scales. When I invest in individual companies I begin to understand the company as a business partner. When I invest in mutual funds, I see only YTD returns and charts.

Common Mistakes

Before I started to learn about investing, I did invest in mutual funds. I figured that a “guaranteed” 10% return would be great. Along with that naivety, I found myself following some common traits.

1. I looked at the percentage gains and chose funds based on the previous years returns.
2. I chased after rising funds.
3. I somehow always seemed to look at “growth” funds.
4. I switched between funds like a race driver switching lanes.
5. I figured a 2% expense ratio didn’t affect my investment returns.
6. I had no idea what I or what the mutual funds were doing and I didn’t do anything about it.

Now 1-5 are all common silly mistakes but the real problem was no. 6. I didn’t know what was going on. Since I didn’t know what I was doing, I was making the first 5 mistakes.
So why wasn’t I doing anything about it? If you read my about me page you would know that I believed I was incapable of investing on my own. But here I am doing it old school style.

Fast Forward with Clarity

I began to notice a trend whenever I went out to a restaurant or even a health supplement shop and asked for a recommendation. Guess where the salesperson always led me? Straight to the highest margin product. Sure they would mention something about another product, but the conversation would quickly focus again on the high margin product.

Witnessing this time after time, a question finally popped into my head. Are brokerage firms or financial advisers trying to sell me something based on margins or commissions without much regard for my financial future? For the majority, the answer is YES. They are all businesses and like all businesses, they need to sell something, sometimes anything, in order to make a buck. This means mutual fund companies have to sell the good the mediocre and even the bad funds. They will pass it all off as good funds of course.

Mutual funds also spend truckloads of cash in advertising and marketing to seduce the first time investors by claiming “performance figures” and diversification, but with so many companies in a mutual fund, there are sure to be bad companies in the mix. The truth is that mutual funds are a product of the financial markets so that companies can make money. Not to make you money.

I’ll end this with a Munger quote.

When you mix raisins and turds, you still have turds – Charlie Munger

Advice of the Day

Throw your rubbish in the bin. If it’s too far, throw it from where you are.