That question came to mind as I read the July issue of "the No-Load Fund Investor." In addition to providing the wretched figures for the month of June, the terrible statistics for the second quarter, the horrible numbers for the first six months of the year, and the mind-numbing losses for the last 12 months, editor Sheldon Jacobs also provided the ghastly performance figures for the preceding 27 months--- the commonly accepted starting time for this bear market.
In that period, investors in the most widely held mutual fund, Fidelity Magellan, have lost 35.1 percent of their money. Shareholders in Vanguard Index 500 fund, the second most widely held fund, have lost 32.1 percent of their money.
Ironically, those losses aren't so bad.
Fidelity Growth lost 55.9 percent, most of the go-go Janus funds lost over 50 percent, and finding losses over 70 percent is oppressively easy. If that isn't enough, things have gotten steadily worse since July 1.
So it isn't surprising that a lot of people aren't interested in up-to-the-minute online portfolio figures. Or that others are heaving their monthly statements in the trash, unopened, as if they were junk mail. Who wants to know?
My suggestion: escape into a good book.
The one I have in mind is titled "The Four Pillars of Investing" (McGraw Hill, $27.95 HB, 297 pages). Written by William Bernstein, an Oregon neurologist with a wry wit and an obsessive interest in the subject of investing, the book is an easy read. It imparts the knowledge of a textbook with the ease of a beach novel.
If you've been hurt, doubt every decision you've ever made, doubt the decisions others have helped you make, and don't know what to do or where to start, this book draws the map you need.
What are Dr. Bernstein's "pillars?"
The first is the theory of investing. Here he shows that risk and return are related. They have been related since the ancient Greeks financed shipping. From there he takes us on a quick tour of modern portfolio theory. He shows why only the most rare chimpanzees can beat market returns. Unfortunately, picking the best chimp is next to impossible. This means we need to invest with index funds.
The second is the history of investing. This includes a brief discussion of manias and bubbles. The bursting of the famed South Sea Bubble in the 18th century, for instance, brought a political reaction that included sending four Members of Parliament, who were directors of the South Sea Company, to the Tower of London. Thinking of our friends at Enron and WorldCom, or of analysts at Merrill Lynch, I'd say could learn from the Brits.
The third is the psychology of investing. He introduces us to the basics of behavioral finance and invents the INEPT model of investing which is the acronym for Investment-Entertainment-Pricing-Theory.
The theory explains how investors willingly throw away return in exchange for fleeting entertainments.
The fourth is the business of investing. He shows that what's good for a major brokerage firm isn't what's good for investors. He also devotes a well-deserved chapter to the financial press and its weakness for "financial pornography"--- lurid coverage of star money managers.
But does he tell us how to invest our money?
Yes, he does. That's the last section of the book. There, you'll find some recipes and a quote we should all bear in mind.
"It is all right to lose significant amounts of money in stocks as long as it is due to the vicissitudes of the overall stock market. Do not be afraid to do so and do not feel badly when it happens. This is the inevitable price you pay for the long-term superiority of stocks. In fact, a very famous investor once said that from time to time it was the duty of an investor to lose money."
Now that we've all done our duty, in spades, I have a suggestion. Read this book. Learn how to do better.
On the web:
Dr. Bernstein also writes and publishes an interesting journal on the web
Here are links to earlier columns about Dr. Bernstein:
The Coward's Portfolio (001203SU)
Bequeathing Your Assets To Your Broker (961117SU)
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