The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [285]
† Today, the maximum sales load on a stock fund tends to be around 5.75%. If you invest $10,000 in a fund with a flat 5.75% sales load, $575 will go to the person (and brokerage firm) that sold it to you, leaving you with an initial net investment of $9,425. The $575 sales charge is actually 6.1% of that amount, which is why Graham calls the standard way of calculating the charge a “sales gimmick.” Since the 1980s, no-load funds have become popular, and they no longer tend to be smaller than load funds.
† Nearly every mutual fund today is taxed as a “regulated investment company,” or RIC, which is exempt from corporate income tax so long as it pays out essentially all of its income to its shareholders. In the “option” that Graham omits “to avoid clutter,” a fund can ask the SEC for special permission to distribute one of its holdings directly to the fund’s shareholders—as his Graham-Newman Corp. did in 1948, parceling out shares in GEICO to Graham-Newman’s own investors. This sort of distribution is extraordinarily rare.
* Dual-purpose funds, popular in the late 1980s, have essentially disappeared from the marketplace—a shame, since they offered investors a more flexible way to take advantage of the skills of great stock pickers like John Neff. Perhaps the recent bear market will lead to a renaissance of this attractive investment vehicle.
† “Performance funds” were all the rage in the late 1960s. They were equivalent to the aggressive growth funds of the late 1990s, and served their investors no better.
* For periods as long as 10 years, the returns of the Dow and the S & P 500 can diverge by fairly wide margins. Over the course of the typical investing lifetime, however—say 25 to 50 years—their returns have tended to converge quite closely.
* One of the “doomed companies” Graham refers to was National Student Marketing Corp., a con game masquerading as a stock, whose saga was told brilliantly in Andrew Tobias’s The Funny Money Game (Playboy Press, New York, 1971). Among the supposedly sophisticated investors who were snookered by NSM’s charismatic founder, Cort Randell, were the endowment funds of Cornell and Harvard and the trust departments at such prestigious banks as Morgan Guaranty and Bankers Trust.
* As only the latest proof that “the more things change, the more they stay the same,” consider that Ryan Jacob, a 29-year-old boy wonder, launched the Jacob Internet Fund at year-end 1999, after producing a 216% return at his previous dot-com fund. Investors poured nearly $300 million into Jacob’s fund in the first few weeks of 2000. It then proceeded to lose 79.1% in 2000, 56.4% in 2001, and 13% in 2002—a cumulative collapse of 92%. That loss may have made Mr. Jacob’s investors even older and wiser than it made him.
† Intriguingly, the disastrous boom and bust of 1999–2002 also came roughly 35 years after the previous cycle of insanity. Perhaps it takes about 35 years for the investors who remember the last “New Economy” craze to become less influential than those who do not. If this intuition is correct, the intelligent investor should be particularly vigilant around the year 2030.
* Today’s equivalent of Graham’s “scarce exceptions” tend to be open-end funds that are closed to new investors—meaning that the managers have stopped taking in any more cash. While that reduces the management fees they can earn, it maximizes the returns their existing shareholders can earn. Because most fund managers would rather look out for No. 1 than be No. 1, closing a fund to new investors is a rare and courageous step.
1 See Jason Zweig, “Did You Beat the Market?” Money, January, 2000, pp. 55–58; Time /CNN poll #15, October 25–26, 2000, question 29.
1 Sector funds specializing in almost every imaginable industry are available—and date back to the 1920s. After nearly 80 years of history, the evidence is overwhelming: The most lucrative, and thus most popular, sector of