Dancing with the Devil

About 8 years ago, my friend Rob and I pondered whether to make an investment in Philip Morris, the cigarette manufacturer. 

The company, now known as Altria, had been rocked by yet another anti-smoking related lawsuit.  But we knew that—despite lawsuit after lawsuit—this company just kept churning out the profits.  Its share price, however, really got kicked in the teeth, so Rob and I were tempted.  Should we or shouldn’t we buy shares?

In the end, we opted out—not because we didn’t think we could make a killing on the stock, but because of the ethical component of owning a cigarette manufacturer.

The stock went on to gain 300% from that point, and then dropped recently back to the 2002 level.

 The blue line represents more than a 5000% gain for Philip Morris (since 1970) versus about a 1,500% gain for the S&P 500 since 1970.  Clearly, it would have paid to invest in sin.

If you don’t care about the ethical issues, buy the stock.  It’s cheap, and over time, I believe that it will more than satisfy investors.  I think you’ll make a killing.  Pardon the pun.

Less harmful, but certainly bordering on a different ethical dilemma involves the purchase of mutual fund companies.  No—I’m not talking about investing in their funds.  Clearly, that’s a fool’s errand.

I’m talking about buying their stocks.  You see, when mutual fund companies (ahem) rip people off with high fees,  that “money for nothing” goes into the companies’ pockets.

It’s even better than buying shares in a company that sells addictive products because, when you buy cigarettes, at least you know that you’re forking over your $5 a pack, or whatever it is.

With mutual funds, most of the people who buy them have no idea what their fees are.  And they don’t compare their performances with a relative benchmark—so they continue paying fees to the owners of those fund companies.

We all know that the greater the profits a publically traded company can reap from its “customers”, the higher (long term) the stock price will rise.

If you think companies like Apple (AAPL) are profitable for shareholders, let me show you an example of what a stock can do when its customers aren’t aware of the money they’re throwing at it (in this case, in terms of mutual fund expenses)

Let’s have a look at Apple, and compare its long term stock appreciation with Franklin Resources, the company that operates the Franklin/Templeton mutual funds.

My goodness, since 1985, Apple (representing the blue line) would have made you about 17,500%.  That’s a lot.  But if you had owned a profitable mutual fund company, like Franklin Resources, you’d make your Apple buddies drool with envy.  They wouldn’t understand how you could make so much dough by investing in something so dull (not to mention predictable) but it wouldn’t matter.  Your 40,000% since 1985 with Franklin Resources (the green line) would have made Apple seem….well….comparatively poor.

But that has to be a one off, right?  Nope.  Enter a business that can reap HUGE profits from unaware customers, and you have yourself a cash cow.

Let’s have a look at T. Rowe Price and Raymond James Financial.  Since 1988, they’ve made 8000% and 7000% respectively.  T Rowe Price is the green line below, with Raymond James Financial representing the blue line.

Look below, and you can see that T.Rowe Price comes up way ahead of Apple over the same time period.  In fact, if you had invested in shares of both of these stocks (Apple and T Rowe Price) since 1985, you would have made more than twice as much with the mutual fund company as you would with the sexy inventor of the ibook, iphone, ipod and the new ipad.  Pity.

Charles Schwab?  Same thing.  It too, has come out far ahead of Apple over the long term.  The green line below represents Apple’s stock appreciation since 1990, while the blue line represents the great supermarket of mutual funds, Charles Schwab.

The word on everyone’s lips is Apple, Apple Apple….but should it be?  How about a company from a sleeper industry that can continue taking, taking and taking from investors, without them even realizing it.

Apple is probably set for a plunge anyway; it’s price isn’t sustainable.  …read more

Long term, it isn’t generally sexy companies that reap the most profits anyway.  It’s the dull ones you’d never expect. 

So, back to my buddy Rob: 

Rob, is investing in a mutual fund company like investing in Philip Morris?  And are we selling out on morals if we do it?  What do you think?

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

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13 Responses

  1. I love the comparisons! I have to admit that looking at mutual fund companies as investment is not something I have looked into but it really make sense. Don't focus on the fact that it may not be your choice of investment but that it is widely used and will continue to be.

    Thanks for the charts.

  2. Andrew Hallam says:

    Hey Passive Income Earner,

    Thanks for the comment. I read a finance book years ago that was published back in 1991, and it talked about what a lucrative industry it was to sell mutual funds—you get to reap huge profits from people, and they don't even know that they're paying for those profits.

    Anyway, this book gave me the idea for this blog post. The book (and the title escapes me right now) took a Canadian mutual fund company, and indicated what its best mutual fund would have earned compared to what the fund company earned for its shareholders if you had bought the company's stock, and not its top mutualf fund. The comparison was, of course, laughable. You would have been far wealthier owning the company's stock than buying its funds. Then it went through every publicaly traded Canadian mutual fund company, and compared its stock results with the results of its funds. Same thing. Then it did the same with Australian fund companies and some U.S. fund companies as well.

    Back in 1991, the author suggested that you'd never have to feel like you missed the boat, because that boat was always leaving the harbour. That's why he suggested buying the stocks of mutual fund companies instead of their funds.

    Last week, I wanted to see if that premise still holds true. It does. And the results are even more dramatic than they were in 1991. For this post of mine, I wanted to show how freakishly profitable it has been to invest in fund companies. The most high-flying stock that most people think of today is Apple. So that's why I used Apple as a comparison. If we were comparing these above fund companies with the mutual funds they sell, then the difference would be even more dramatic.

  3. Mich @BTI says:

    Excellent post Andrew!

    I will keep this information in mind ,it will come in handy in the future when my investment activity grows.

  4. Joe Chan says:

    Great comparison. I knew the mutual funds companies and brokers did well, but I didn't realize how well they have done relative to the S&P 500. No wonder they keep pushing funds to consumers.

  5. Andrew Hallam says:

    Thanks Mich,

    I cleaned it up a bit since you last read it, and updated it a bit. I was missing one of the charts and I thought I could clarify a few extra points. Anyway, I'm glad you found it interesting. And I think it might be a good industry to buy in to, especially after a market crash (when most people are foolishly selling their mutual funds).

    Hey Joe,

    Thanks for the comment! Yeah, the mutual fund companies have crushed the S&P 500. And it makes sense. But isn't it odd that you never hear about that? Pick a public traded fund company, and the story is the same. They rock. I compared these fund companies to Apple, which has also beaten the S&P 500–to show how extreme the profits have really been over time. It takes a lot to leave Apple in the dust. And it looks as if the public traded mutual fund companies have done that. My next post should compare their stocks' appreciation with their best funds. Now that would be laughable.



  6. Vicki says:

    I was part of the activity managed mutual funds for years. Had an advisor that sent me fancy statements and talked about how wonderfully “diverse” my portfolio was. What I didn’t realize then but I do now is that my boat was always just leaving the harbor but not getting anywhere… Not exactly how I had envisioned my money working for me.

  7. Andrew Hallam says:

    Hey Vicki,

    The company you dealt with made money ever year though. It's good that you're no longer stuck in that harbor paying tariffs!


  8. CrazyCanuck says:

    Rarely do 100% nice guys…or 100% ethical guys…make tons of money.

    Phillip Morris and high-fee actively managed mutual funds are one and the same in my books – neither does the 'buyer' any good. But where does the 'it is not ethical to buy this' stop? Is investing in oil companies that cause environmental disasters ethical? (think BP) How about food companies that sell products that are proven to have no proven health benefits (and in fact harmful to one's health)? (think Coke). What about companies that exploit the poor and elderly (think – 'insert name" pharmaceutical company).

    If someone wants to make money, then they should buy what is going to make money. If someone wants to 'do good', there are far better ways to do it than buying any stock or mutual fund. One's $1000 or $10000 investment in a stock is going to substantially affect anyone's life….but your 1000 or 10000 hours giving to others definitely well.

    Ok…so I went off on a bit of a tangent so will stop here. If you want to read about someone who gave up monetary wealth to help others, read this.. .

  9. Hey Crazy Canuck,

    Those sorts of "tangents" are welcome anytime!

    You're absolutely correct. Before I check that link you gave me, is it the story about the Brit who started off building a village in the Phillippines after selling his BMW, and then he gave away his billion dollar fortune to do good? That's an incredibly inspiring story.

    Send links like that anytime.



  10. cynical investor says:

    my post on May 24

    "This post Dancing with the Devil made me check the stock of Altria.

    And it seems to be the devil.

    So yield 6.66% and institutional ownership 66%. I do not even dare search for the exact figure as it might be 66.6%. "

  11. Ahh, Cynical Investor:

    I'd definitely want you on my team if things every go awry during a fool moon!

  12. Great charts and comparisons! This post certainly dove-tails nicely with the Let Me Mail YOU a $10 Bill. From an investment perspective, I'm convinced being 'an owner' of a company (stocks) is much better than just being 'a user' of the company's products (funds). A great line indeed "…you’d never have to feel like you missed the boat, because that boat was always leaving the harbour." Would you agree that boat had lots of passengers? 🙂

    I wonder long much longer these profits for fund companies will continue? My most recent blogpost about Sun Life wrestles with this issue given SLF has recently announced they are expanding their mutual fund business line. Is there that much (more) money to be had in mutual funds? Will an aging population needing wealth and insurance protection drive this need even further? Sun Life believes so…

    About Apple. You're probably aware they just passed Microsoft as the world's largest tech. company in terms of market capitilization. I wonder how much more upside they (Apple) have? Will Apple eventually pass big oil Exxon as world's#1?

  13. Hey Financial Cents:

    Hey Financial Cents:

    Thanks for the commendation on the post.

    I think history is filled with businesses that outreached themselves. Where companies stand, in terms of net profit is really the bottom line, I think, rather than a short term market cap. I remember when Toyota passed GM in market cap. But for more than a decade, Toyota's profits were so much higher. I think Apple's PE will come back down to earth. What do you think? Of course, the late 90s was filled with high market cap businesses that exceeded so many other businesses, combined, but their relative profits weren't high and eventually, market cap had to re-align itself with profit levels.

    As for fund companies–with an uneducated financial population, there will likely be loads of future money to make owning fund companies profitable Thoughts on that?

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