[Infowarrior] - Comment: Bad investment practices

[Richard Forno]

Some Friday Food For Thought, since the economy is (rightly) on  
everyone's mind these days:

I got the annual report (ending June 2008) for a UBS global fund I've  
got a small investment in the other day.  To their credit, they break  
down "what worked" and "what didn't work" in rather clear and simple  
English.  In fact, the entire report is pretty darn readable, which  
was quite nice.  However, under the "what didn't work", this really  
got my attention:

< - >

Subheading:   "Within the US equity component an overweight to  
financials—particularly banks—and an
underweight to energy hurt Fund performance."   ....and then the.first  
line of the descriptive paragraph to follow:    "Though financial  
stocks did not perform as well as we expected, we continue to  
overweight them."  (p26)

< - >

I'm sorry -- but doesn't that sound like bad investing style? As one  
of my favorite commodity traders is prone to say, "do more of what is  
working, and less of that which is not."   If after a few months the  
trade isn't working, common sense says GET OUT and move to what is  
working!

But it gets better, for the next sentence of the paragraph reads:  "In  
general, we are finding very attractive valuations within  
financials."  Huh???  We've got UBS (and I'm sure tons of other  
brokers or fund advisors) basing their fund investments on valuations  
in a market where the data used to create such valuations is not to be  
trusted (does anyone know what the value of anything is worth this  
year, or when more surprise writedowns will be announced?)  This past  
year, valuation models have proven utterly worthless.  I said so to  
friends back in May.

Then, when their analysis and decisions on where to invest don't work,  
rather than adjust fire to move into what IS working they stick to  
their guns and overweight themselves to that losing sector/position/ 
trade anyway.  Part of this is how the "system" of mutual funds works,  
I understand that.  But still ..... hold and hope, anyone?

As one of millions of  invest---er, victims of such practices, I'm  
reminded of those old trading jokes about brokerages and managed funds  
-- "We earn wealth the old fashioned way....we steal it."  Or, perhaps  
more appropriately, where the definition of 'asset allocation' or'  
'wealth management' really means that the brokerage is able to  
effectively "allocate (or manage) wealth from your account to ours."   
Bear that in mind when watching ads for brokerages or Wealth  
Management firms ... remember, they get paid regardless if you make or  
lose money!   (Disclosure: Although I am not a huge fan of mutual  
funds, I do own several as part of my overall retirement portfolio -  
some have done well, some have not. C'est life.)

If I didn't welcome this paper loss to offset trading gains elsewhere  
this year, I'd be pretty livid.  As it is, though, I'm pretty torked  
at the philosophy behind this (and I'm sure many other) mutual funds  
who "stick to their guns" at all costs.....makes a pretty darn good  
case to do your own homework and research on your own investments -  
whatever they may be, stocks, bonds, funds, etfs, etc -- for at least  
we "little people" might be (or are) more flexible in changing our  
investing style with the current environment.   That's part of our  
ability as individual investors and something made much more  
convenient for us thanks to the Internet and discounted online trading  
-- namely, being nimble, adaptable, and flexible, which is something  
the "big guys" can't be so easily.  Put another way, in terms of  
investing flexibility, if the "big guys" are the Titanic (ha!), we're  
the high-performance racer.  Embrace that power to quickly navigate  
around the iceberg, take a breath to clear your head, and come back to  
look for and pick up survivors that will reward you handsomely down  
the road!  Thus endeth the lesson.  :)

Of course, in full disclosure,  I'm partly to blame for this -- three  
years ago I broke my own rule and bought into a mutual fund run by my  
broker.  I've done that twice before over my career, and been burned  
twice.  Never again!

Have a great weekend, all.

-rick

(c) 2008 Richard Forno. Permission granted to reproduce in entirety  
with credit given to author