You’re playing tennis with an invisible opponent. It doesn’t matter whether you’re good at the game or not, because you’ve been given some odd instructions.
When the ball comes to you, hit it into the net. Or knock it out of bounds.
Ok—you’ll “mess up” the odd shot and it will land “in” on your opponent’s side, but don’t fret.
Your job is to let your opponent beat you badly. Sound strange? Sure it is—but play with me on this one.
After an hour of playing, the truth is revealed. You’ve been playing different invisible players—ten of them, to be exact. They’ve rotated through every seven minutes or so.
If these guys can fog a mirror, you’d imagine that they’ve all kicked your butt, right?
How could they not?
But they haven’t beaten you by much. Two of them, in fact, have produced scores very similar to yours.
These must be lousy players, you figure. After all, you were trying to lose every point.
Let’s reveal the players. The best ten players in the world. And they were trying their best.
| Rank | Name & Nationality |
| 1 | Nadal, Rafael (ESP) |
| 2 | Djokovic, Novak (SRB) |
| 3 | Federer, Roger (SUI) |
| 4 | Murray, Andy (GBR) |
| 5 | Soderling, Robin (SWE) |
| 6 | Davydenko, Nikolay (RUS) |
| 7 | Del Potro, Juan Martin (ARG) |
| 8 | Berdych, Tomas (CZE) |
| 9 | Roddick, Andy (USA) |
| 10 | Verdasco, Fernando (ESP) |
Not to embarrass them by name, but two of them played almost as badly as you did. And you were trying your best to lose as badly as possible.
Is this scenario at all realistic? In tennis, it isn’t.
But in finance—it is.
In April of last year, I asked my readers to suggest the worst stocks they could think of: stocks that they figured were heading downwards in a hurry.
I put those lousy stock selections into a portfolio that I was going to track.
At the same time, I asked my readers to come up with the ten best mutual funds they knew. My readers were pretty resourceful. Many of them admitted that they just googled what the most respected mutual funds would be for 2010, and they picked some top performers from the list.
Well, 4 months have passed. Since April, 2010, the stock markets have dropped. This is the kind of climate that suits mutual fund professionals, relatively speaking. They’re supposed to be able to predict market drops, and keep money in cash so their entire portfolios don’t plunge with the market.
Those super mutual fund managers must have seen this coming, right? Unfortunately, they didn’t.
As of today, the selected Superfunds are down 6.87%, as an agregate.
| Selected Super Funds | |||||
| 10/08/10 | |||||
| Company Name | Cost | Current Value | Gain / Loss | Gain / Loss % | Today’s Gain / Loss |
| American Funds Mut;A | $25.90 | $40,237.65 | ($4,254.01) | -9.56% | $171.81 |
| Amer Cent:Hertge;A | $18.47 | $48,024.36 | ($4,849.78) | -9.17% | $343.44 |
| Dodge & Cox Stock | $104.50 | $45,999.79 | ($4,137.63) | -8.25% | $172.72 |
| FMI:Large Cap | $15.19 | $47,423.31 | ($2,566.98) | -5.13% | $263.28 |
| Fidelity Puritan | $16.98 | $48,787.15 | ($1,462.21) | -2.91% | $88.76 |
| Fidelity Sel Energy | $45.57 | $46,139.82 | ($3,850.47) | -7.70% | $164.55 |
| LM CM Value Trust;A | $39.72 | $45,225.10 | ($4,742.66) | -9.49% | $264.18 |
| American Funds NWld;A | $52.57 | $50,149.50 | ($2,684.05) | -5.08% | $271.35 |
| T Rowe Price Eq Inc | $22.99 | $47,078.86 | ($3,117.44) | -6.21% | $283.87 |
| Sound Shore | $30.62 | $46,396.75 | ($3,789.12) | -7.55% | $295.00 |
| $196.04 | |||||
| $1,112.68 | |||||
| $465,658.34 | ($34,341.66) | -6.87% | $2,318.95 | ||
They’ve done slightly worse than the U.S. stock market index which has lost 6.62%.
So much for the super mutual fund manager’s ability to protect you during a downturn.
| U.S. Index | |||||
| 10/08/10 | |||||
| Company Name | Cost | Current Value | Gain / Loss | Gain / Loss % | Today’s Gain / Loss |
| Vanguard T Stk Idx;Inv | $30.14 | $466,878.98 | ($35,088.43) | -6.99% | $2,998.15 |
| $22.55 | |||||
| $1,989.96 | |||||
| $466,901.53 | ($33,098.47) | -6.62% | $2,998.15 |
But that’s not the really interesting part.
If the Superfunds represent those top invisible tennis players, and if my readers’ selections of “lousy stocks” represent you—trying your best to miss every shot. Then would any of these Superfunds have come close to my readers’ purposefully lousy performance?
The answer is….yes.
To carry on with the thematic tennis analogy—-yes, two of the Superfunds would be going into “tiebreakers” with a bunch of stocks selected for their “junk” factor.
The “lousy stock” portfolio has fallen 9.83% since April.
But remember, my readers picked stocks that they hoped would go down.
| 23 Loser Stocks | |||||
| 10/08/10 | |||||
| Company Name | Cost | Current Value | Gain / Loss | Gain / Loss % | Today’s Gain / Loss |
| Alcoa Inc. | $14.34 | $17,710.90 | ($4,069.64) | -18.68% | $106.33 |
| American International Group Inc. | $40.17 | $22,527.24 | $796.10 | 3.66% | $384.11 |
| AOL Inc. | $28.52 | $17,228.82 | ($4,505.79) | -20.73% | $129.54 |
| ATC TECHNOLOGY | $18.21 | $28,739.58 | $6,998.79 | 32.19% | $11.94 |
| Bank of America Corp. | $18.68 | $16,191.24 | ($5,550.63) | -25.53% | ($58.20) |
| Burger King Holdings Inc. | $21.82 | $17,197.49 | ($4,607.47) | -21.13% | $189.86 |
| Citigroup Inc. | $4.62 | $19,196.40 | ($2,550.69) | -11.73% | $94.10 |
| Ciena Corp. | $18.07 | $16,505.16 | ($5,231.01) | -24.07% | $348.87 |
| Ford Motor Co. | $12.80 | $22,171.95 | $431.75 | 1.99% | $16.99 |
| GameStop Corp. Cl A | $23.67 | $19,241.28 | ($2,488.59) | -11.45% | ($9.18) |
| Goodyear Tire & Rubber Co. | $13.96 | $17,293.80 | ($4,450.29) | -20.47% | ($77.90) |
| Juniper Networks Inc. | $31.26 | $19,863.10 | ($1,865.64) | -8.59% | $410.05 |
| Kimco Realty Corp. | $16.47 | $20,321.23 | ($1,629.98) | -7.43% | $253.18 |
| KRISPY KREME DOUGHNUT | $4.88 | $17,905.08 | ($3,840.43) | -17.66% | $0.00 |
| Eli Lilly & Co. | $36.94 | $21,732.48 | $13.53 | 0.06% | $52.92 |
| Microsoft Corp. | $30.46 | $18,259.93 | ($3,460.91) | -15.93% | $42.78 |
| NUTRISYSTEM INC | $19.02 | $21,979.89 | $241.47 | 1.11% | $331.47 |
| News Corp. Cl A | $15.48 | $19,838.60 | ($1,906.74) | -8.77% | $28.10 |
| Pfizer Inc. | $17.18 | $20,998.72 | ($971.67) | -4.42% | $230.19 |
| BANCO SANTANDER SA ADR | $14.58 | $20,484.98 | ($1,493.12) | -6.79% | $75.37 |
| Textron Inc. | $22.56 | $20,246.37 | ($1,521.10) | -6.99% | $154.41 |
| USG Corp. | $18.87 | $14,549.76 | ($7,186.95) | -33.06% | $714.24 |
| Zions Bancorp | $24.58 | $19,306.56 | ($2,423.31) | -11.15% | $176.80 |
| $1,365.50 | |||||
| $2,128.38 | |||||
| $450,856.07 | ($49,143.93) | -9.83% | $3,605.97 | ||
Two of the SuperFunds have performed nearly as badly: The Great American Funds Mutual and Bill Miller’s Legg Mason Value Trust.
Miller, in case you’re curious, is one of history’s greatest mutual fund managers. But like Federer (or more likely, Tiger Woods) he has fallen from the perch recently.
In tennis, if you’re trying to lose against the top players in the world, you’ll lose. Badly.
That’s a silly statement, but I want to juxtapose it with the financial one:
In Finance, you can try to lose as badly as possible, but you might still threaten the results of some of the best professionals in the business.
Over a few years, I think the lousy stocks will actually beat the collection of super mutual funds. The fees on the funds will pose a drag. Kevin, at Investitwisely, describes it well here: How Mutual Funds Rip You Off with Extra Fees and Charges
