Mutual Fund's Ridiculous Disclosure to Investors

Investors,
  
  Attached below is an intriguing and quite amusing article that quotes a mutual fund's (IPS Millennium Fund) final disclosure letter to investors, near the peak of the internet bubble in the early 2000's. For those of you who don't know what happened in the early 2000s to the stock market, basically investors poured their money into internet start up companies in the 1990s, hoping that these new advanced technological companies would one day become profitable. High-tech companies with actual earnings were driving the technology sector (Intel, Cisco, Oracle, etc), but it was the upstart dotcom companies that created a massive stock market rally beginning in 1995 based on pure speculation. Nobody really knew what was going on with the internet or what it even was at the time, but everyone wanted a piece of it, which caused incredible overvaluations of dotcom companies who couldn't keep up according to their actual earnings. And over time, this overvaluation was simply unsustainable. The bubble bursted.

  Keep that in mind while you read the article below. Basically, the Mutual Fund Manager is hilariously blunt to all of his investors, stating that they shouldn't come crying back to him if the fund loses money day in and day out. In that part, I agree with the Fund Manager. You shouldn't be worried about the daily hiccups in the market if you're a long term investor. Too often, people check their daily ups and downs to see how their invested money is doing, yet what does that do besides stress you out if you aren't seeing green? If you're plan is to invest longer than a year's time, that shouldn't matter to you anyways. As I've stressed in the past, actively traded mutual funds, like IPS Millennium Fund, try to outperform the market through their "expertise" and rack up anywhere from 2-4% in fees per year. Therefore, if the fund actually earns a return of 8% in a given year, yet they make 3% in fees, you actually only make 5%. Avoid fees, they can destroy your future potential wealth down the line. On the otherhand, index funds, such as Vanguard 500 Index Fund (VFINX) simply tracks the S&P500 and purchases all of the stocks within the index. Therefore, they don't rack up trading fees, and expenses and fees come down to something extremely low like .15%. Something to keep in mind, from 1993-2013, the S&P 500 index returned an average annual return of 9.28%. The average mutual fund investor made just over 2.54%, AN 80% DIFFERENCE!

  I hope you enjoy the article, as one can imagine, the actively traded mutual fund IPS Millenium Fund, went out of business shortly after when the internet bubble burst and their stock picking "expertise" couldn't keep pace with the market. Incredibly accurate point of view from the mutual fund investor, getting queries from their clients about why their money is down one day and up the next!

In other news, Federal Reserve raised interest rates to 1 percentage point today, more on what that means another time. Peace!

Max Maudsley

http://jasonzweig.com/best-mutual-fund-disclosure-ever-dont-come-crying-to-us-if-we-lose-all-your-money/

Investing in Real Estate and Warren Buffett

The other day, I saw an article shared on Facebook titled “Warren Buffett’s Best Investment.” The article was referring to a vacation property that Buffet purchased in 1971 for $150,000. Today, the home is listed for $11,000,000. People are astonished. People commented about how this exemplifies the profitability of investing in real estate. Due to my general disbelief that real estate is a good investment over the long haul, I decided to do a simple opportunity cost analysis. Granted, Buffett purchased this home for vacations not necessarily as an investment to grow his portfolio. Nonetheless, what if Buffet invested the same $150,000 in his company or the S&P 500?

Here is what I found:

Buffett’s Berkshire Hathaway, from 1965 to 2015, earned an average annual rate of return (with dividends reinvested) of 19.6%. If he invested the $150,000 at that rate over the same time period he owned the home (46years), the present value would be over $550,000,000. This exponential growth from $150k to $550 million exemplifies the power of compounding. Investing early, even small amounts pays huge dividends down the road.

Nevertheless, a 19.6% return is a remarkable feat. Here is a more realistic comparison:

It would take an average rate of return on the 150k of 9.8% for 46 years to equal 11-million-dollars. The average rate of return of the S&P 500 over the same period, with dividends reinvested, was 10.34%. At this rate, the 150K would be worth almost 14-million-dollars. That is three-million-dollars more. It is worthy to note that the 0.54% return over the course of 46 years made a three-million-dollar difference. This demonstrates how large an impact fees can have on an individual’s retirement portfolio. Be conscious of fees.

Was this Warren Buffett’s greatest investment? No, but a 9.8% return is great. Warren Buffett acquired this home for living. The point of this post is to encourage people to think twice before investing in real estate. It isn’t a sure bet, and you should consider the opportunity cost of choosing another investment vehicle. Once you throw in the various costs of ownership such as property taxes, maintenance, etc., other investment vehicles look even better. Further, owning physical property presents a problem of liquidity.

Personally, I believe homes are for living. From 1900-2012 the U.S. real estate index has returned 3.4%. This barely beat the average annual rate of inflation. I think the attractiveness for most people centers on tangibility, less volatility, feeling more in control, and the common “my parents purchased this home 40 years ago for 100K now it is worth 300K.” Of course, there are always exceptions, and people have made great livings investing in real estate.

That is my take.

Thanks. Matt.