The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [286]
2 The research on mutual fund performance is too voluminous to cite. Useful summaries and links can be found at: www.investorhome.com/mutual. htm#do, www.ssrn.com (enter “mutual fund” in the search window), and www.stanford.edu/˜wfsharpe/art/art.htm.
3 That’s not to say that these funds would have done better if their “super-star” managers had stayed in place; all we can be sure of is that the two funds did poorly without them.
4 There’s a second lesson here: To succeed, the individual investor must either avoid shopping from the same list of favorite stocks that have already been picked over by the giant institutions, or own them far more patiently. See Erik R. Sirri and Peter Tufano, “Costly Search and Mutual Fund Flows,” The Journal of Finance, vol. 53, no. 8, October, 1998, pp. 1589–1622; Keith C. Brown, W. V. Harlow, and Laura Starks, “Of Tournaments and Temptations,” The Journal of Finance, vol. 51, no. 1, March, 1996, pp. 85–110; Josef Lakonishok, Andrei Shleifer, and Robert Vishny, “What Do Money Managers Do?” working paper, University of Illinois, February, 1997; Stanley Eakins, Stanley Stansell, and Paul Wertheim, “Institutional Portfolio Composition,” Quarterly Review of Economics and Finance, vol. 38, no. 1, Spring, 1998, pp. 93–110; Paul Gompers and Andrew Metrick, “Institutional Investors and Equity Prices,” The Quarterly Journal of Economics, vol. 116, no. 1, February, 2001, pp. 229–260.
5 Amazingly, this illustration understates the advantage of index funds, since the database from which it is taken does not include the track records of hundreds of funds that disappeared over these periods. Measured more accurately, the advantage of indexing would be overpowering.
6 See Benjamin Graham, Benjamin Graham: Memoirs of the Dean of Wall Street, Seymour Chatman, ed. (McGraw-Hill, New York, 1996), p. 273, and Janet Lowe, The Rediscovered Benjamin Graham: Selected Writings of the Wall Street Legend (John Wiley & Sons, New York, 1999), p. 273. As Warren Buffett wrote in his 1996 annual report: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” (See www.berkshirehathaway. com/1996ar/1996.html.)
7 A complete listing of the S & P 500’s constituent companies is available at www.standardandpoors.com.
8 See Noel Capon, Gavan Fitzsimons, and Russ Alan Prince, “An Individual Level Analysis of the Mutual Fund Investment Decision,” Journal of Financial Services Research, vol. 10, 1996, pp. 59–82; Investment Company Institute, “Understanding Shareholders’ Use of Information and Advisers,” Spring, 1997, at www.ici.org/pdf/rpt_undstnd_share.pdf, p. 21; Gordon Alexander, Jonathan Jones, and Peter Nigro, “Mutual Fund Shareholders: Characteristics, Investor Knowledge, and Sources of Information,” OCC working paper, December, 1997, at www.occ.treas.gov/ftp/workpaper/ wp97-13.pdf.
9 Investors can search easily for funds that meet these expense hurdles by using the fund-screening tools at www.morningstar.com and http://money. cnn.com.
10 See Matthew Morey, “Rating the Raters: An Investigation of Mutual Fund Rating Services,” Journal of Investment Consulting, vol. 5, no. 2, November/ December, 2002. While its star ratings are a weak predictor of future results, Morningstar is the single best source of information on funds for individual investors.
11 Unlike a mutual fund, a closed-end fund does not issue new shares directly to anyone who wants to buy them. Instead, an investor must buy shares not from the fund itself, but from another shareholder who is willing to part with them. Thus, the price of the shares fluctuates above and below their net asset value, depending on supply and demand.
12 For more information,