Post of the Day
July 7, 1998

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Subject: Re: Tell me its not true!!!
Author: GlowingFire

OK, I read the article, but now I have questions about your original post:

"Now I read in the July issue of Individual Investor that TMF has indulged in 'sleight-of-hand' in portfolio performance reporting, according to Gary Karz of Investor Home (www.investorhome.com). He was supposedly the first to 'debunk the Gardner brothers'."

First of all, I'm not sure what you mean by "sleight-of-hand," which I now take to be your own words and not those of the article, which the quotation marks would suggest. Several of the Motley Fool portfolios have indeed lost versus the S&P 500 and Nasdaq. The 'Running With The Market' portfolio ended up in red. Big time. But 'sleight-of-hand' suggests either that i fratelli Gardner have either cooked their numbers to portray a better than actual return, or have attempted to hide their returns.

But the quotes provided in the article seem to suggest otherwise. "Despite the wildly unsuccessful project we aired in 1995 called Running With the Market, a real-money portfolio that finished down more than 60% after less than six months ... " came directly from a Fool Port article, for instance. In addition, any one of us can go to the daily articles or the Foolish Four, Boring, Cash King or Drip portfolios and see exactly how they are doing. If you do that, you'll see that the article is correct. Most are down versus the S&P and Nasdaq, most by not much, and (as was written in a recent Cash King report, at least) some are gaining.

Second, one might think that the closing of what the article calls Motley Fool #1 and The Running With the Market portfolios was in some way deceptive. I cannot answer for anyone at TMF, but they were, after all, real money portfolios. I don't think any of us expects TMF to keep open underperforming real portfolios just to provide online proof of their losses. Anyone would sell out a position they think will never come back. As I mentioned above, TMF was still 'willing' to talk about TRWM portfolio and its difficulties a year and a half after it closed. I may be the biggest fool around here, but that doesn't seem like deception to me.

Third, realize that only the Foolish Four portfolio adheres to the principles stated in their books. The other portfolios are attempts at other strategies. So anyone reading their books and trying to figure out whether the ideas seem to work or not would (should) refer to that portfolio. It has been winning. You might have (at least) three objections to this point of view though:

(1) What about Motley Fool #1? Didn't that underperform? Wasn't it Foolish, too?

(2) Wait a minute! The current Foolish Four has underperformed 3 out of the last 4 quarters? Winning??

(3) Yes, fine, Foolish Four, blah blah. But might a reader not think the other portfolios are great ideas from the Gardners as well and be lulled into getting into them based on the 'success' of the Foolish Four?

Good questions. Glad you asked. :c)

(1)

I have only been interested in this Foolishness since I read TMFIG last October, so I cannot say how TMF came up with their choices for Motley Fool #1. I would assume that their work is an ongoing process and that perhaps their first-cut at these principles was not the best. I would give them the benefit of the doubt until they have a chance to respond themselves.

(2)

Well, yes, from Table 3 in the article, the Foolish Four has lost to the S&P 3 of the last 4 quarters and to Nasdaq 2 of the last 4 quarters. But total returns are not based on wins and losses per se, but the combination the magnitude of these wins and losses produce. As Table 2 showed, in the last 4 quarters, the Foolish Four has returned 52.1%, Nasdaq 50.3%, and the S&P 45.5%, probably the reverse order of what one might have intuitively expected from the 'wins and losses' summary. Still, the Gardners themselves say in TMFIG that, if you cannot find a strategy that beats the market, invest in a market index.

Remember, though, that these strategies have a very long-term focus. Notice the last column of Table 2 ... since inception, the Foolish Four is up 276.7%, the S&P is up 140.4%, and Nasdaq is up 154.9%. It would seem that the Foolish Four wins some years and loses some years against these indices, but that it may win over the long haul, which is its aim.

(3)

Yes. I think there will be some people who hear about the Fool, get into one of the books, find the site and leap into another strategy based on their fascination with the original ideas. From my brief interaction with TMF to date, I think the writers have done a pretty good job of making it clear that these are separate strategies. In addition, in their books and at their sites, TMF has consistently advised that you take no one's advise about any investment or strategy until you check it out yourself. It's your money, it's your decision, make it. Don't let anyone make it for you by blindly following their suggestions.

Fourthly (after the thirdly about six paragraphs back), it would seem to me that the Investor Home writer is being a bit deceptive himself by 'suggesting' that there is something amiss when TMF closes a portfolio, or that they are losing based on quarterly wins and loses, and leaving actual interpretation of the figures up to the reader. Notice that the article only mentions that the Foolish Four lost to both indices for four consecutive quarters the only time it ever happened (according to the data provided in the article). And this was just after two quarters when the Foolish Four returned about 60%, the S&P 9%, and Nasdaq 13%. That looks like selective journalism. And since I don't see anywhere in the article that the writer actually gave TMF an opportunity to respond to the 'charges,' he seems to be a bit slipshod in his attempt to be fair.

Fifth, I am wondering how you figured out that this article was by Gary Karz, "the first (writer) to 'debunk the Gardner brothers'." I couldn't find either the author's name or the 'debunk' quote anywhere in the article. I am brand new to Investor Home, so perhaps you saw it somewhere else or have been a long-time fan of the writings of Gary Karz, but I looked around the site a bit and could not confirm either the writer of this article or his/her historical ability to debunk anything. I will assume that I just missed the references somewhere.

Finally, I'm not sure how 'upset' Investor Home is with TMF, since it keeps a link to the Fool in its main page and it appears to have several articles, current and archived, about the Fool, none of them particularly anti-Fool. I will have to look around their site a bit more to decide whether the opinions in the article (stated pretty mildly, I might add) are due to the writer alone or the 'publisher.' Thanks for the reference, in any case. I always want to see other points of view, as part of my neverending research into what I should really be doing with my invest-able funds. And, if you're still with me, thanks very much for wading through this prolix post.

==> david


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