JUPITER, FL (Oct. 4, 1999) -- It happens at the end of every quarter. It is called window dressing. The term may remind you of a Thanksgiving feast, but this type of "dressing" is far from appetizing. Alarmingly, however, newspapers and financial television programs report on window dressing as if it were as American as baseball, apple pie, the Internet, and Thanksgiving. The act of window dressing at a mutual fund (which we'll describe in a moment) is typically reported by the media in a fashion similar to this:

"Stocks are volatile today because mutual fund managers are doing some window dressing to close the quarter. Fund managers are simply trying to make their funds look as attractive as possible before disclosing an updated list of holdings to the public. So, they're buying stocks that have been hot recently, and selling their losers. Next up, Mary will report your local weather."

Yes, that's how it is reported. Let's play along with it for a moment.

Sooooo, that's what fund mangers are doing each quarter: simply sprucing up the nest to make it look attractive. Great! That's a relief. You see, I always believed that when you take quick, last-minute action that involves significant and meaningful change (such as stuffing all your dirty laundry under the bed just before your parents visit), what you're actually doing is trying to deceive people. You're trying to appear as something you're not. You're trying to look better than you are. This is what I believed.

Well, in the case of mutual fund window dressing, this is exactly what fund managers do: They deceive potential and current investors. Window dressing is as close to lying as a mutual fund manager can go without actually fibbing. Let's finally explain window dressing with an example.

If America Online's stock did well this quarter and a mutual fund didn't own it, it could take a stake in the stock on the very last day of the quarter (such as last Thursday) and then it could report AOL as part of the fund's quarterly holdings. On the flip side, if the fund had held Merck all quarter and Merck had declined, the fund could sell its stake the day before quarter ended and basically hide the fact that it held the poor performing investment. Fools know that one quarter is too short a period to measure for investment performance, but mutual funds do measure themselves by the quarter and therefore they adjust fund holdings accordingly to look better to the public each quarter. Effectively, fund managers take last minute action to deceive the public regarding their positions.

Would you ever stoop so low? Imagine that you owned 3Com for the past year. Imagine you sold 3Com and bought Amazon on September 30. A friend calls on October 1: "What do you own, my buddy? How is your portfolio doing?" You answer, "I own Amazon. Yup." Your friend is impressed. You just smile while guilt gnaws your brain. You can't say anything else positive about your investment without it being a lie.

This is what mutual funds effectively do every quarter. The final day of the quarter arrives and they sell the losers (erase their tracks) and buy the recent winners. On the books, it will appear that they own the best-performing stocks from the past quarter: the AOL, the Amazon, the Costco. This is deceptive. This is a serious disservice to the investing public. Not only are investors deceived, but they pay the price of a lower performance due to a slew of trades at the end of each quarter.

How can window dressing be addressed and rectified? Easily.

All mutual funds should be required to report not only current holdings, but the date that the position in each holding was taken. If a fund buys a stock over many months (as many funds do), the date of the initial position would be reported. If a fund sells a portion of a holding (or an entire holding), the date of the most recent sale is reported to the public. Also, the position sold should not just conveniently drop from the list of holdings when the quarterly report is published. A history should be shown. Another fact that investors should demand to see from mutual funds is the average purchase and sale prices of each transaction so that an investor can quickly discern what percentage was made or lost on any trade, and over what time period.

Is this too much to ask? These are not difficult requirements to implement and they would eliminate most of the deceptive window dressing that we see from mutual funds at the end of each quarter and every year.

This deceptive practice should not be so readily accepted by the press and by the financial world. It shouldn't be tolerated in the first place.

Today, Today, Today -- Get your "Today" here!

America's favorite bronco bucked higher on moderate trading volume in advance of tomorrow's Federal Reserve meeting on interest rates. Consensus belief is that tomorrow the Fed will leave interest rates as untouched as spinach on a five-year-old child's plate. (For information on why these meetings occur, see the Fool's homepage tomorrow. Special content on the Federal Reserve's meeting will be rolled out again like a red carpet.)

The S&P 500 gained 1.66% today, the Nasdaq lunged ahead a big 2.16%, and the Rule Breaker, bless her broken but quickly mended heart, lost today, moving only a tad. The BreakerPort is up over 32% for the year, ahead of the competition. One month ago she trailed the Nasdaq.

"Look ma, no mouse!"

Cordless phones arrived decades after Mr. Bell cranked up his telephone invention. Not so with the Internet. Cordless (or wireless) Internet access already graces us with its omnipresence. Early adapters of wireless include Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY). Both companies announced the availability of their services on wireless devices alongside the launch of 3Com's (Nasdaq: COMS) Palm VII, which sports countrywide wireless Internet service. (Read Amazon's news; read eBay's news.)

If mobile phones interrupt your life when you're away from computers, just think what an eBay junkie's life will consist of with wireless Internet. Imagine deep in the Alabama woods:

"Mary Jo, will you marry..."


"Wait a second, Billy Ray! I've just been outbid. Damn that... [she looks at her
portable screen] HoochieCoochie45 on eBay!"

Forward we race and wireless means convenience, right? Nod your head. If you need access all the time, it's convenient all right. Cars, phones, key chains, ID cards -- all of these items have Internet access to some degree.

Also in the news, late Friday night it was officially reported that eBay will launch 50 new websites by year-end to provide auctions to specific geographic regions across the country. Los Angeles is a local eBay test market that has grown more rapidly than eBay's overall site (of course, "eBay LA" began from a small base). Regional market services make the most sense for the sale of large items, including cars, boats, houses, pianos, horses, cattle, airplanes. eBay's regional service is just one reason why eBay is our favorite to continue to lead the online auction wars. As the pure-play in auctions, eBay has more means to customize the auction experience.

Meanwhile, America Online (NYSE: AOL) is our favorite company to keep raking in big, high-margin bucks. AOL announced a mammoth $200 million potential deal with Travelocity today. A portion of the contract is guaranteed and, as with many of AOL's agreements, the remainder will be paid based on results. To put into perspective how quickly the online world and AOL is growing, five years ago America Online's total market value was only about $200 million.

With about 20 million customers subscribing to its Internet service provider brands, America Online is in one of the sweetest spots in cyberspace. AOL will continue to land monster-sized, multiyear contracts "just" for giving advertisers and other companies the chance to dip their buckets into the tidal wave that is formed by the sea of daily AOL users.

Fortune magazine is asking, "AOL: Future King of Advertising?" I don't know what the magazine thinks. I haven't read the article yet. I don't need to, however, in order to make a guess. What is the competition? NBC? (I don't know. Thinking....) The fact that I can't name a single company scoring new contract and ad dollars the way that AOL is makes me want to say, "Yes, AOL could be the future king of advertising." I'll read the magazine article before my next Rule Breaker column. Save ya the $4.95.

Potential Rule Breakers

If you're looking for potential Rule Breakers, make sure you didn't miss Paul Larson's column last Friday, and the column that he links to within that column. Paul puts many interesting companies, including fiber optic (broadband) firms, on the Rule Breaker Radar.

For a study of broadband companies and analysis of the broadband industry overall, consider the Fool's subscription Internet Report on the topic for $20. I wrote the industry study, and if you don't like it, you know where to flame me. Plus, if you don't like it, the Fool will refund ya. What the heck. We're just that free-spirited.

Visit the Rule Breaker companies board to discuss potential rebel-rousin' Rule Breakin' companies. Until we meet again....

Fool on!