OUR TAKE

Don't Invest in Generalizations

	Email this page Format for printing Reuse/Reprint
	Related Links CNBC: A Day of Missing Information The Post's Snow Job
	Discussion Boards The Motley Fool Take

By Bill Mann (TMF Otter)
April 28, 2003

When you come across an article with this kind of reasoning, "If just 1% of the money rotated from large-cap funds to mid caps, that would translate into a 4% rise in the amount of cash spent on mid caps," turn the page.

Just as unexplored places on maps in the Middle Ages were labeled "that way be dragons," the article's author doesn't know what's coming. So he guesses. The fact that his guesses sound authoritative doesn't change the fact that they are blind guesses.

Of course, I'm not sure what I should've expected from an article called, "Mid-Caps May Be Best in Months to Come." The piece was issued forth by Reuters (Nasdaq: RTRSY) over the weekend, and Yahoo!'s (Nasdaq: YHOO) Finance section thought enough of it to put it in a lead slot. 

I think articles like this must sit in newsrooms around the globe in Mad Lib-style. Just fill in the verbs and nouns, get a quote, tag it, and bag it. No thought required.

Referring to the offending line above, what does the rotation of money into funds have to do with the value of any single mid-cap stock? And, more importantly, what earthly effect would a rotation into mid-cap funds do for the underlying performance of mid-cap companies? And since when does a cohort of several thousand companies, spanning every industry, in every phase of their business cycles, do anything at the same time?

The author posits that mid caps didn't suffer as severe a drop as large caps. He says they could have values, and then asks a couple of mid-cap mutual fund managers whether they like mid caps going forward. Can you believe it? Mid-cap fund managers, who make money based on their ability to get people to put assets under their management, like mid caps over the near future?! Color me stunned.

Got that? Never mind that mid-cap funds and mid-cap stocks are two different things. And never mind that the hope of a fund rotation has absolutely no bearing at all on whether any one of the companies in this cohort is a good investment at this or any other price. Just wishing for the inevitable pop from a rotation in funds is enough, apparently.

Never mind that fund managers have no real insight into what stocks are going to do in the short run.

Heck, it might happen. It'll be a nice change of pace for the folks who make prognostications to get one right for a change. Won't change the fact that it would be blind, stupid luck, though.

It can't be said enough: Don't invest in generalizations.

The Motley Fool is investors writing for investors. To view a writer's current stock holdings, check out his or her online personal profile.