Sunday, August 23, 2009

Sell Your Mutual Fund

If you are visiting my blog for the first time, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?

Here is the speech I gave at a local Toastmaster Club. It is more inspirational than theoretical. But it can serve as the reminder of the danger of the unsuspecting minds. Some details have been altered to protect the privacy of the people mentioned. 

Thank you, Toastmaster! Fellow member and distinguished guests!

Mutual fund becomes part of our lives. People rely on mutual fund to secure their long term financial perspective! Not owning a fund is shocking to the unobservant minds! Originally I was thinking of giving a speech on how to choose a mutual fund! I filtered the entire mutual funds universe with some simple criteria. We have tens of thousands mutual funds out there, as a matter of fact, we have more mutual funds than the listed securities the mutual funds supposed to buy. I am shocked to find only a handful funds passed the filter. That got me thinking about the entire mutual fund industry. Eventually, I changed my topic to: sell your mutual funds!

There are three reasons for this action: people, organization and us.

Professional management is the biggest selling point for mutual funds! And here, I am going to pick on my little brother. First, he is not in this room. Second, there is a long enduring sibling rivalry between us. Last but not least, he makes a lot of more money than I do. He recently became a fund manager at one of the best selling mutual fund family -- Waddle Incorporated, focusing on Asian Pacific market.

Don't get me wrong. My little brother is a mathematical genius. When he was 8 years old, a group of John Hopkins researchers announced that only one of 20 million has his minds to handle high math. I believe, if my brother sets his mind to do search engine, we would not have "Google" or "Bing", we will have something better, perhaps called "Wang".

The problem, my little brother works at Waddle, is that it does not take a math genius to invest successfully. The successful investors, Warren Buffet, Larry Tisch and Carl Icahn, none of them know how to do calculus, linear algebra and matrices! On the other hand, those geniuses, the Nobel Price winners at long term capital, the
world bridge  champion at Bear Stone and the Quants at Lehman brothers, lost their shirts! Successful investing only involves discipline, persistence and common sense. If the professional doesn't have those qualities, the smarter he is, the more he eventually loses!

But the mutual fund industry keeps hiring those geniuses, and showers them with obscene amount of money out of shareholders' expense! Can't you believe after the fiasco of the long term capital in 1998, the same genius got funded only to be wiped out again ten years later! In 2008! And before long term capital, this guy ruined a perfect good party at Smith Barney. Sell your mutual funds!

Second. Let's talk about internal conflict of interest between the shareholders and fund management.

Even if the fund loses shareholder's money, a lot of money, the fund management still has the audacity to charge the shareholders a fee! And as a shareholder, you will not notice the fee because the management will never tell you. Image this! For our outstanding effort of 2008 reducing your portfolio from $700, 000 a year ago to $400, 000 today, we will only charge you $8000! No, if you want to figure out how much you spend on your mutual funds, you will in the footnotes of the financial statement, find the total expense, divided by the total shares outstanding and times the shares you own. Then, if you add transaction cost, taxes and many other small items, you will be surprised at how much you pay for the privilege having someone else managing your money. The results, the management gets rich along with its employees, and you will be shocked how little staff those companies employ, and the shareholders lose! And I have not even mention all the scandals: market timing, soft money and Ponzy schemes! Sell your mutual funds!

Here is a true story. CY Lewis, before he became one of the biggest success in Wall Street, was a shoe salesman. Once he sold two, not one, but two pairs to a widow for her husband. Talking about something we will never need. I guess a dead man doesn't need two pair shoes.

Last but not least, we can do better. Anyone who ever goes to Las Vegas knows this game. Sometimes you win, sometimes you lose. The house always wins by design the odds and payout. Now let's say it is the stock market. Sometimes you win, sometimes you lose. But odds and payout are in your favor. Do it through a mutual fund is like giving money to a gambler, if he wins, you share the profit. If he loses, you bankroll him. Bad deal! I am always wondering why 40, 50, 60 years old gentlemen and ladies, well to do, doctors, lawyers and accountants, give their money to a twenty year old, fresh out of school, even the suit he is wearing is a rental. If you yield your responsibilities of managing your own money, why do you think someone never make a nickel out of his life will manage your money responsibly. Sell your mutual funds!

Let's summarize. 1st, the mutual fund industry always hires the wrong people. 2nd, the fund management is always working against your. Last, a common person will always do better to take the responsibility of managing his own money into his own hands. Get some self confidence! For your long term security, for the benefits of your retirement, your heirs, sell your mutual funds! When you go home tonight, you don't want to eat dinner, you don't want to talk to your spouse, you don't want to play with your dogs, you turn on your computer, log on to your account, you sell your mutual funds! And never, ever buy another mutual fund!

Thank you.

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