This publication has never attempted to focus on what we consider to be nearly impossible except for rare exceptions: Trying to make a great deal of money quickly, with very little continuing effort expended or pain along the way. Yet the feedback I have received suggests that that is exactly what most investors are seeking to accomplish, and thus, many of these same investors are feeling "bedazzled, bewildered, and betrayed" by a stock market that they feel has turned against them.
Another reality that should now be increasingly apparent is that the investment advice that is so freely distributed via television, newspapers, magazines, and even, yes alas, the Internet is frequently highly one-sided and therefore at times way off the mark. Two glaring examples come to mind:
The highly touted PBS television show Wall Street Week, hosted by Louis Rukeyser, a newsletter writer himself and visited weekly by a rotating panel of almost celebrity like experts, is viewed by millions and millions of people. The experts have generally been correctly bullish for year after year. However, for the last year they have remained virtually unanimously bullish in spite of the warning signs and have failed to even slightly anticipate the severe correction the market has been undergoing for the last 8 months. Louis Rukeyser even went so far as to throw off the show one of these 25 or so panelists because she was viewed as being inappropriately "too negative"! (As I recall, this was perhaps a little more than a year ago. Perhaps we could have all used at least one small voice of dissenting opinion at that time).
Likewise, some of the financial world's most followed analysts have failed to steer their flock around this year's huge pothole. Although I don't follow their pronouncements in detail, two of the more prominent names that come to mind are Abby Joseph Cohen and Jeffrey Applegate. I recall not to long ago that Ms. Cohen was still saying that stocks were headed for a decent, although not great, return this year. (Maybe it will still happen, but time, just like for Al Gore, appears to be running out. If you feel I have done either the Wall Street Week show or either of the above analysts a great injustice, please let me know and I will stand corrected.)
It all goes to show that the most popular sources of investment advice, while reassuring to us to know that they "must know their stuff" to have gotten where they are, aren't necessarily going to have any better crystal ball than the small newsletter writer, such as me whose newsletter only reaches at best a few hundred.
In spite of all the carnage this year (at least some of which, incidentally, we warned our readers about in advance of their occurrence), there still have been some outstanding opportunities for those who did not necessarily follow what the conventional and highly popular experts were telling them and instead looked for other opinions elsewhere, such as in this publication, among other places. Consider the numbers below and then compare them to the minus 10.5%, minus 9.8%, and minus 34.3% returns shown thus far this year for the S&P 500, the Dow Industrials, and the Nasdaq Composite (all figures are thru 12-1-00):
The average REIT (real estate) fund is up 18.7%.
(The Vanguard REIT Index, our recommended model portfolio fund, is up 18.5%.)
The average small and mid-cap value funds are up 8.4% and 8.8% respectively.
(Our model portfolio small and mid-cap value funds are Fidelity Low Price Stock, up 12.5%, and T. Rowe Price Value, up 9.4%.)
The average long-term govt bond fund is up 13.1%, the average single state long-term municipal bond fund is up 8.1%, and the average intermediate term "mixed" bond is up 7.3%,
(Our model portfolio long-term govt bond fund, Vanguard Long-Term Treasury is up 16.3%, our model portfolio long-term municipal bond fund, Vanguard CA Insured L-T, is up 12.9%, and our model portfolio intermediate term "mixed" bond, PIMCO Total Return Instit, is up 9.6%)
Note: All fund data are from www.morningstar.com
These less than a full year's outstanding numbers prove that even in a bad year, wise choices were possible to have been made at the beginning of the year which would have paid off smartly. These returns should be highly gratifying for anyone not obsessed with the dream of finding individual stocks or mutual funds that will continue to earn 20% or more year after year.
In fact, in an earlier Newsletter, I attempted to get across the the idea, as unsexy as it might sound, that even when earning somewhat moderate returns, say about 12% a year on average year after year, the sensible investor could still potentially amass huge sums of money if they had the patience to keep that money invested over a 15-20 year period.
Sadly, I think, most people are not convinced. The lure of trying to make truly big bucks quickly within your investment portfolio, even though probably very few are able to accomplish this without racking up large losses as well along the way, will persist.
Unfortunately, our strategy cannot turn a losing year for stocks into a winning year either. However, by attending to the asset categories with the most promise over the upcoming year or two or maybe even more, we have greatly reduced the losses incurred by just investing in the most aggressive funds. (A complete breakdown of our model portfolio results will be presented in our Newsletter of around Dec 31st; please let me know if you have any suggestions for the Newsletter of around Dec 16th.)
In the meantime, we continue to call your attention to what we said in one of last year's Newsletters which is that low fund prices are in many ways more desirable than high prices for the long-term investor. This is unless, of course, you must sell, or as a result of lack of patience, you decide to switch out of a down-trodden fund at a loss.
In spite of this rather poor year (for some fund categories, although clearly not all), we are reasonably optimistic that a well chosen strategy of diversified fund investing offers the potential for good returns starting in the upcoming year or so ahead.
Tom Madell, PhD