In a recent blog entry, billionaire investor Mark Cuban heaves a potent dose of venom at the stock market in general and mutual funds in particular.
He's wrong for the most part, you know. But let's try to work our way back to his mindset gracefully.
Let's start with a little kudos for Cuban. He's excelled as both an investor and a speculator. Obviously, his decision to take Broadcast.com public and then sell it to Yahoo! (Nasdaq: YHOO ) for billions as the dot-com boom was peaking was a brilliant call. The other Cuban achievement that the media tends to harp on is his timely acquisition of the Dallas Mavericks team, turning the NBA squad into a perpetual winner quicker than you can say Dirk Nowitzki.
That's great. He's also been a regular guest on The Motley Fool Radio Show, so you know he can't be that bad. I'd work the Blizzard mixer at his Dairy Queen anytime.
I've always been particularly fascinated by Cuban's life as a Wall Street speculator. He understands the froth and the lulls and has an uncanny knack for being at the right side of the mania more often than not. How else can one explain his ability to turn a profit on a seemingly helpless company like Mamma.com (Nasdaq: MAMA ) or an unheralded yet profitable penny stock like Tucows (AMEX: TCX ) ? He's also assembled the pieces behind a pretty impressive media empire of the future.
He's not humble, but you don't have to be modest if you're right more often than not. Speaking of which, I just want to call him out on some of the instances where he just happens to fall short in his latest stock market salvo.
Smoking a Cuban
Mark's thesis -- that the stock market is for suckers -- is flawed in many ways. He argues that "buy and hold" is bunk, but then criticizes mutual funds for their high asset turnover rates. He argues that his own success is due to his access to other CEOs and the ability to take major positions in companies, but he never gives mutual funds the nod for being able to do the exact same thing.
In scouring the world of 17,000 mutual funds, Cuban writes off the countless alternatives as drivel, merely marketed for the sake of self-interested financial players bent on fattening up management fees. "Everyone is getting paid on the gravy train, except for the guy putting in the money at the end."
Not quite, Mark. For starters, give us little guys some credit. Money follows performance. Fidelity Magellan (FUND: FMAGX ) didn't become the country's largest mutual fund due to a crafty marketing campaign. It's because Peter Lynch rocked as a stock picker. Now that the fund has been a laggard in recent years under his successors, shareowners have bolted in droves.
"Funds are in the business of making money for themselves first," Cuban wrote. "You second."
You couldn't be more wrong, Mark. I mean, sure, a fund is a business, but it's a performance-driven business. Neglect the second, and you blow the first. You should know that all too well. Run your Mavericks to the ground for a few seasons or substantially hike your ticket prices, and let the empty seats show you the error in your thinking.
In fact, why wait until then? In your argument, you're right in boasting about your Wall Street prowess. "I've traded stocks for almost 20 years now," you wrote. "I'm good at it. When I work at it. And it takes a lot of work."
Excuse me? Isn't that the perfect argument for participating in the historical success of the stocks as an asset class by buying into a mutual fund? The bulk of your case against the market plays right into the argument of going the mutual fund route.
What's that? You don't have time to sort out the countless funds? Man, have I got a friend for you. His name is Shannon Zimmerman, he runs the Champion Funds newsletter service. He was a mutual fund analyst with Morningstar before launching his asset allocation models and singling out worthy funds. He's good at it. He works at it. Yes, it does take a lot of work.
Just two of the 34 mutual funds that Shannon has recommended to his subscribers since launching the newsletter two years ago are in the red at the moment, and barely at that. The average pick is up 18%, far better than the 10% gain produced by the respective market averages.
Is Shannon yet another conductor on your runaway gravy train? Not really. The community of subscribers don't have to kick in loads, fees, or advisory charges beyond the flat subscription rate. And Shannon will find the companies with established management teams, market-thumping performance, and reasonable expense ratios and turnover rates.
I'll even let you in on a 30-day free trial. OK, we let everyone in on a free trial subscription. That doesn't mean you can't take it as a personal invitation to see whether it changes your mind on the state of the mutual fund industry.
Where Mark is on the mark
Not everything in the Maverick blogger's rant is off base. In fact, a lot of it is on the money. He takes the fund industry to task for many of the same things that have always bugged us in Fooldom. Some fund managers are making too much money despite being perpetual market laggards. Portfolio turnover -- which Mark cites as 85% annually -- is way too frequent and costly.
"But even if performance sucks, rather than saying how bad it is, they pick the short stint when it wasn't so bad," he wrote. Brilliantly sad, yet true. The way some fund families cherry-pick their marketing financials and the hot funds they choose to promote is deplorable.
He also argues that the one rule in successful investing is to "always have a definite knowledge advantage about the company you are trading."
True, Mark. Yet isn't that another reason to approach the stock market through market-thumping mutual funds that eat, sleep, and chug the companies they invest in?
Let's look at Ron Muhlenkamp, for instance. He runs the independent Muhlenkamp (FUND: MUHLX ) mutual fund that Shannon recommended to his subscribers three months ago. When your name is on the company letterhead, you better believe that you're going to take things seriously. Muhlenkamp's been the fund's manager since it was launched just over 17 years ago. He eats his own cooking, investing his money alongside his fellow fund shareowners.
He runs a tight ship. Asset turnover has run a tax-friendly 7% over the past year. His performance has been extraordinary, turning a $10,000 investment 10 years ago into $48,000 today -- an annualized return of 17%. As a contrarian investor, Mark, I think you would get along with Ron. Shannon knows how to pick 'em.
About that Mark Cuban Fund
So here's where I throw the gauntlet down. Has it ever crossed your mind to start your own mutual fund, Mark? You're buying in big lots. You've mastered the market. You've even published your entire portfolio online, so it's not as though you have anything to hide. Why not let Joe Aristotle Public in on the fun?
No way, you say? But you have to admit that it would be cool. I think you'd be the first to admit that you would consistently beat the market. Right?
So here's where it all comes full circle. If you'd be capable of running a hot fund, what's to say that there aren't other Mark Cubans out there doing the same thing? You mentioned the 17,000 funds. Have you kicked all 68,000 tires?
Yes, there are winners out there. Legg Mason's Bill Miller just beat the market for the 15th consecutive year in a row. A fluke? The streak will end? They said that after five years. Then 10 years. Then a dozen straight winning years. He's done it in a way you would likely approve of, Mark: as a maverick. Despite the "value" in his fund's moniker, he has squeezed out juicy gains out of top growth-stock holdings like Google (Nasdaq: GOOG ) , Amazon.com (Nasdaq: AMZN ) , and IAC/Interactive (Nasdaq: IACI ) .
Not all investors are the same. You know that. Not all fund managers are the same. Shannon knows that.
Oh -- and I wasn't kidding about the free trial offer.
Longtime Fool contributor Rick Munarriz thinks that funds are part of a balanced portfolio breakfast. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.