The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [102]
The fact that a few closed-end funds are selling at premiums greater than the true 9% charge on most mutual funds introduces a separate question for the investor. Do these premium companies enjoy superior management of sufficient proven worth to warrant their elevated prices? If the answer is sought in the comparative results for the past five or ten years, the answer would appear to be no. Three of the six premium companies have mainly foreign investments. A striking feature of these is the large variation in prices in a few years’ time; at the end of 1970 one sold at only one-quarter of its high, another at a third, another at less than half. If we consider the three domestic companies selling above asset value, we find that the average of their ten-year overall returns was somewhat better than that of ten discount funds, but the opposite was true in the last five years. A comparison of the 1961–1970 record of Lehman Corp. and of General American Investors, two of our oldest and largest closed-end companies, is given in Table 9-5. One of these sold 14% above and the other 7.6% below its net-asset value at the end of 1970. The difference in price to net-asset relationships did not appear warranted by these figures.
Investment in Balanced Funds
The 23 balanced funds covered in the Wiesenberger Report had between 25% and 59% of their assets in preferred stocks and bonds, the average being just 40%. The balance was held in common stocks. It would appear more logical for the typical investor to make his bond-type investments directly, rather than to have them form part of a mutual-fund commitment. The average income return shown by these balanced funds in 1970 was only 3.9% per annum on asset value, or say 3.6% on the offering price. The better choice for the bond component would be the purchase of United States savings bonds, or corporate bonds rated A or better, or tax-free bonds, for the investor’s bond portfolio.
Commentary on Chapter 9
The schoolteacher asks Billy Bob: “If you have twelve sheep and one jumps over the fence, how many sheep do you have left?”
Billy Bob answers, “None.”
“Well,” says the teacher, “you sure don’t know your subtraction.”
“Maybe not,” Billy Bob replies, “but I darn sure know my sheep.”
—an old Texas joke
Almost Perfect
A purely American creation, the mutual fund was introduced in 1924 by a former salesman of aluminum pots and pans named Edward G. Leffler. Mutual funds are quite cheap, very convenient, generally diversified, professionally managed, and tightly regulated under some of the toughest provisions of Federal securities law. By making investing easy and affordable for almost anyone, the funds have brought some 54 million American families (and millions more around the world) into the investing mainstream—probably the greatest advance in financial democracy ever achieved.
But mutual funds aren’t perfect; they are almost perfect, and that word makes all the difference. Because of their imperfections, most funds underperform the market, overcharge their investors, create tax headaches, and suffer erratic swings in performance. The intelligent investor must choose funds with great care in order to avoid ending up owning a big fat mess.
Top of the Charts
Most investors simply buy a fund that has been going up fast, on the assumption that it will keep on going. And why not? Psychologists have shown that humans have an inborn tendency to believe that the long run can be predicted from even a short series of outcomes. What’s more, we know from our own experience that some plumbers are far better than others, that some baseball players are much more likely to hit home runs, that our favorite restaurant serves consistently superior food, and that smart kids get consistently good grades. Skill and brains and hard work are recognized, rewarded—and consistently repeated—all around us. So, if a fund beats the market, our intuition tells us to expect