Wednesday, January 13, 1999
The Year of the Fool
by Sara Finch [email protected]
Has anyone noticed an increase in whining and hand-wringing on the part of the Wise? The beginning of the new year always brings a torrent of articles in the Wise publications (written months ago) and a stampede of Wise talking heads and gooroos on TV, telling us what last year meant and what will happen this year.
This year it seems the Wise just aren't happy campers at all. This year there are more and more articles and Wise pronouncements explaining our "foolishness" and trying to justify their poor performance.
The Wise should be afraid -- very afraid. Fools are changing the stock market. The increasing power and influence of the individual investor is showing up in several ways:
- The Wise predicted we'd cut and run, taking our money with us, if confronted by a steep correction or bear market. However, it was the Wise who cut and run in the 1998 correction, and the individual investor who didn't panic, who stayed in and then profited from the rebound.
- The Wise made fun of the Internet and its publicly traded companies, saying they were "a mania," a bad investment, the companies didn't have earnings, and so on. Well, it was the Foolish who saw the potential of the Internet, and bought in. Now it's the Wise who are in a panic to get aboard, and they're driving the prices of Internet stocks to incredible levels with the Foolish individual investor profiting.
- The individual investor is fueling the growth of Internet trading and discount brokers. One e-brokerage pre-announced blowout earnings recently. Charles Schwab's market cap rose above that of Merrill Lynch for a short time last week. (Fitting, considering it was a Merrill Lynch executive who expressed alarm that the individual's use of discount brokers and Internet trading was a threat to financial health. Of course it is -- to the financial health of Merrill Lynch!)
The pain of the Wise is evident in the number of condescending articles and dire predictions about where "this will all end." The insistence of the Wise (for the last three thousand or so Dow points) that the individual investor would pull money out of Wall Street if the going got tough was based on their assertion that individual investors hadn't seen a bear market. Well, this individual has -- I remember the '70s bear market very well. I also remember the reason for the bear: double digit inflation, double digit interest rates, high energy prices, high government debt, etc. Evidently the Wise haven't figured out the relation between a bad economy and a bad stock market.
Typical advice from the Wise has been proved wrong, over and over. But they still just don't get it! I noted one article in the January issue of SmartMoney where the author said (I'm paraphrasing) that there was discomfort in the market rebound, because they realized they could have had bargains like Cisco at 45 and AOL at 45.
Another bastion of Wisdom is falling: the Mutual Fund. 1998 was a disaster for the industry. Morningstar President Don Phillips said on Louis Rukeyser that the performance of mutual funds has been "an embarrassment." Instead of examining the failures, managers defend them. Jason Zweig's article in January's Money is a good example. It's titled "No Dumping: Is your underperforming mutual fund the problem? Or are you?" Evidently underperforming mutual funds aren't a problem, unless an investor has the bad taste to hold the manager accountable and to complain. In the same article he makes a sarcastic reference to people who complain about 10% returns. (It must be incredibly greedy to want more.) He complains that the S&P 500 shouldn't be used as a benchmark for fund performance.
Thank goodness for the Motley Fools. Can you imagine the damage to investment performance if we'd spent this bull market following the usual advice of the Wise -- to use mutual funds, diversify a portfolio and hold 50% stocks, 40% bonds, and cash, then re-balance each year (at hefty commissions) to be sure the percentages stay in line. Instead, many Foolish individual investors beat the averages easily. Now we're looking ahead to another great year, thanks to out Foolish outlook! And with the fun of watching the Wise continue to implode.
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