Investor, Educate Thyself

Of course, it’s really next to impossible to manage a portfolio of mutual funds based on style management. Oh, sure, there’s a lot of newfangled software out there that tracks the investment styles of mutual funds but there are three problems with the whole idea. First, most mutual fund managers are constantly changing the investments that are inside their portfolios. So even if they tend to be a mid-cap growth manager, that doesn’t mean they won’t sometimes invest in a large-cap value stock if they think it represents a good opportunity.

Second, investment managers have been known to change their minds. They are not obligated to stick with one style forever, and if their particular style falls out of favour, you can be pretty sure that their style will change. Because if they don’t change it, the next manager will. After all, fund managers change teams more often than football players. He’s going to do things differently. And that’s the biggest problem of the investment-style tracking software. All it really does is show you how a fund has been managed so far, and like investment performance itself, there’s no assurance that this same investment style will continue into the future. And the third problem is that all mutual funds are misclassified. So you can’t be sure that your “small cap” fund is really buying small growth companies.

But none of these problems really matter. Because your readers don’t know it - and you’re not about to tell them. Instead, your story will focus on this HOT! NEW! Idea called style management. It sounds cool. You’ll have no trouble coming up with fresh stories built around this theme every month. You can focus on a certain asset class, or a certain style within that asset class, or a certain fund within that style within that asset class, or ...

STOP LOOKING FOR TIPS. SEEK EDUCATION INSTEAD

Media coverage of personal finance can be grouped into six types. The first, of course, is the personal finance press.The second is the general media, while it’s not their sole focus, they often cover personal finance. The third group is the business press, including The Business Guardian, Business Express and the Business Newsday newspapers; technical and professional newsletters such such as those put out by CMMB, WISE and BOURSE; as well as magazines such as the Executive Times. The fourth group consists of books. These are, shall we say, numerous - and written sometimes for consumers and sometimes for professionals. Is anything from any of these groups any good? Absolutely. Much of what’s produced is outstanding — and like anything else, much of it is not so good, too. How do you know what to read, and what to ignore?

It’s really very simple. Read, watch, and listen to everything you can, but pay attention only to those that educate. When you come upon something that recommends, you must:
1. evaluate the reasoning behind the recommendation,
2. confirm that you understand the reasoning, and then
3. decide if you agree with the reasoning.
Only if you complete all three steps should you act on the recommendation. Often you’ll have to turn to a second, third, or fourth source for help with these steps.
If, for example, a story or news show is explaining interest rate risk, pay attention, because the education will be valuable. But if they start telling you that interest rates are going to drop, you must:
1. Learn why they think interest rates will decline.
Too  often predictors don’t explain themselves. You must dismiss any recommendation that is not supported. If the rationale is provided, then you must ...
2. Confirm that their reasoning makes sense.
Don’t merely accept what they say; make sure their position is supportable. Here’s an easy way to tell: After receiving their position, repeat it — in your own words — to a spouse, friend, or co-worker. As you are explaining their position, you’ll quickly decide if you feel like an idiot saying whatever it is you’re saying. If your co-workers don’t laugh you out of the building, then ...
3. Decide if you agree with it.

Keep in mind that something isn’t necessarily right simply because it isn’t stupid. Note that when it comes to education and recommendations, most media do a little of both: They have great stories that can teach you a lot, but they also run sensational pieces like “The Best Fund to Buy Now!” and “Retire Before You’re 40!” that have little value other than to attract readers, listeners, or viewers. Of course, people do buy these publications and tune to radio and TV for the hot tips, which has led one prominent figure in the field to accuse some in the media of “financial pornography.” They want to know about the next hot stock. You must make sure you are differentiating the one from the other.

Are the media wrong to offer recommendations? I’ll dodge that bullet, thank you. But I will say this: The media is a business, and their job is to attract readers, listeners, and vieers. Money, for example, does that pretty darn well. But consumers who understand which stories are which are going to be a lot better off than consumers who don’t understand the difference - let alone those who don’t even understand that there is a difference. You’ll discover that it’s an evolutionary process. You start by reading one article. No problem. It’s definitively written clear, and concise, with no chance of a misunderstanding. Its explanation as to why interest rates are about to drop is very convincing. You’re happy, secure in the knowledge that interest rates are headed south. Until you read a second article, which persuasively argues for a hike in interest rates. Now you’re confused. So you turn to a third, hoping it will break the tie.

MARKET TIMING IS DEAD, BEWARE OF STYLE SELECTION

You’re a writer in the personal finance press, and the deadline is looming. You need to write an investment story that will show your readers how to enrich themselves. Market timing stories are always good, but that’s getting pretty stale lately, you need something new.

Diversification is a solid subject. The only problem, though, is that diversification never changes from month to month. So sure, the story will bail you out this issue, but what will you write about next month? Better lay off diversification. No, you need something that’s not only new, but something that changes each month. Something that your readers will like to hear about, but also something that requires updating. Something to bring them back next month. That’s what market timing used to do for you - every month, a different stock pick. In June, it’s get in the market; in July, it’s get out of the market. Readership was really solid in those days. That’s what you need. Something like that. Let’s go back to that diversification thing. Your readers are hearing about it. They’re starting to wonder how to build a portfolio based on it. Trouble is, there’s really not much to it. And now the problem is that all these consumers - your readers - are focusing attention on asset allocation. They’re talking in terms of long-term portfolios, for crying out loud. They used to talk about stock-picking. They used to gobble up stories on “The 10 Stocks to Buy Now!” But this long-term thing is a problem, because it’s leaving you with very little to write about. What you need to figure out is a way to make forest-looking asset allocators act like tree-studying stock-pickers. Wouldn’t it be great if you could somehow integrate stock-picking into their asset allocation modeling?

Hmmm. Pretty good idea. All you need to do is come up with a story that micromanages the asset allocation concept. But to do that, you need an angle. Let’s see. If your readers do this asset allocation thing correctly, their portfolio will look like a pizza pie, and each slice of that pie will consist of a different asset class. Your readers, therefore, are focusing on asset classes, not individual investments. So they really don’t care about stories on a particular company. And for each asset class, they simply choose a mutual fund that invests in that asset class. One mutual fund for the bhaji slice, another for the cheese slice. Because there are lots of kinds of cheeses, the cheese slice will contain samples of every major kind of cheese. For the portion of their portfolio that’s devoted to stocks, for example, they’ll use stock funds, and those stock funds will contain some large companies, some medium-sized companies, and some small companies. Within each of those sizes will be some growth companies and some value companies. They will do this because, on Ajax Street, every dog has its day - so at various times, some types of companies are going to do better than other types of companies. Because the winds change pretty frequently, your readers ought to have all of these types of companies in their portfolio all of the time. That’s about the only way they’ll really be sure they own the right asset at the right time - which is the whole point behind asset allocation, anyway.

Wait! Your readers probably don’t realise any of this. They’ve only recently been introduced to asset allocation itself. They don’t yet realize that stock funds can differ dramatically from each other. They don’t realise that every stock fund’s portfolio manager has his or her own way of picking stocks and of managing a portfolio. That each has a style all his own. What we need, then, is a story about how to build a portfolio based on investment styles. Style management. That’s it. That’s the ticket!