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Top 932. May 6, 2000 9:02 AM

» Rande - Slick,

Slick,

Yes, and hopefully an eye-opener for those who have never taken a close look at the "hidden" costs of active management. While I believe the whole piece is must reading for all investors, my favorite passage is the conclusion to the article. Kirk and I have debated (in a spirit of mutual respect, I might add) the EMH thing, but the author suggests that perhaps such debate misses the point:

Instead of being concerned about whether the markets are efficient, investors should be advised on whether active managers add value in excess of the costs of their efforts. The Carhart mutual fund study found that the average actively managed fund underperformed its benchmark on a pretax basis by almost 2% per year. Although it appears active managers were able to exploit market inefficiencies to some degree, since they underperformed their benchmarks anyway they would have been better off had they never pursued the Holy Grail of outperformance in the first place.

Given their poor performance, how do actively managed funds get away with charging high fees and incurring large costs? It's simple: Investors let them. Investors aren't focused on costs, partly because the markets have done so well in recent years. In addition, investors don't receive a bill labeled management fee or trading costs -- the fees are deducted from the fund's total assets and never show up on an account statement.

Informed investors know their objective is to achieve the greatest percentage of available returns on the asset classes in which they invest. Wall Street doesn't want investors to know that the easiest way to achieve that objective is to minimize all fund expenses -- not only operating expenses, but trading costs, market impact costs, the cost of cash and taxes as well. An investor who knows this would stop paying a 1.5% management fee for a poorly performing actively managed fund and would instead pay much lower fees for tax-efficient passively managed funds.

Vanguard's George Sauter perhaps said it best: "When you layer on big fees and high turnover, you're really starting in a deep hole, one that most managers can't dig their way out of. Costs really do matter." Taxes matter, too. The winner's strategy CPAs and other financial managers should recommend to their clients and employers is to use index and other passive funds. For taxable accounts, use passive funds that are also tax managed.

BTW -- As long as the first article is, the follow-up piece is well-worth the time to read as well.

-- posted by Rande

Top 933. May 6, 2000 9:35 AM

» rich_hine - index approach best for tax-deferred accounts, too?

Rande:

Thanks for terrific article and follow-up posts.

I understand that passive, index, low-tax investing is best for taxable accounts. But, also best for tax-deferred accounts (401-K, IRAs, etc.)?

- Richard

-- posted by rich_hine

Top 934. May 6, 2000 10:19 AM

» Kirk - But an A+ student...

...will always be better than average.

trouble is...

we are NOT wasting our time running a large mutual fund.

MUCH easier to get better performance with a small (say under $50M) amount of money.

For example, can you imagine Fidelity Magellin taking a 5% position in BOWG now or LRCX back when LRCX was selling at $4 a share and had a market cap of $500M? That is an absurd notion thus it is impossible for them to have gotten the 10 bagger that I got in LRCX. Get one ten bagger every couple of years and you beat the market if you only wait for the fat pitches (my other is AMAT as well as I had some and took profits in BOWG after a 10 bagger on some of those shares).

Come to think of it, if you look at the individual stocks in my portfolio that I hold, more than half are 10 baggers or more in under a decade... never looked at it that way before... Mutual funds just don't operate that way.

5% of even a $20B fund is $1B or double the whole market cap of LRCX back then. If Fidelity tried to put 5% into LRCX, it would cause the price of LRCX to probably go up 4x just to establish the position.

Of course, only a few of us were A students at Berkeley or wherever we went, but we learned to not let "the average" weight us down but rather be a benchmark to surpass.

I hardly think the top minds in the country go into running mutual funds unless it is like Kevin Landis (another fellow Berkeley Electrical Engineer) who found this a fun and exciting way to make money after working 10 or 20 years in industry to learn it before investing in it for a living.

Still, I enjoy the debate and will point out the "Mr. Efficient Market Spiegelman" has traded BOWG in and out twice now for his own 10x gain (there abouts) so he must be a bit smarter than the average yogi bear also! Don't let him fool ya! Just it is not for everyone.

-- posted by Kirk

Top 935. May 6, 2000 12:44 PM

» Karin_ - GMH

Rande, there is an offer to exchange the Class H
common stock for each share of $1 2/3 par value
common stock.
This is offered by General Motors Corp.
I own the class "H" shares & "GM" shares.

In your opinion, should I exchange the "H" shares?

Karin

-- posted by Karin_

Top 936. May 6, 2000 1:17 PM

» JackSwanson - ****ALERT-MICHAEL MURPHY SATURDY HOTLINE****

Hotline
Saturday, May 6, 2000

Michael Murphy’s Technology Investing Hotline on Saturday, May 6.

Well, the employment numbers that came out on Friday were not good for sure. The unemployment rate was down to 3.9%. That is the lowest rate in 30 years. The wage is now up 0.4% in the month. That is a little bit of an acceleration from 0.3% although no disaster.

There had been a rumor around though that the Fed might raise interest rates maybe a quarter percentage point Friday morning in response to a bad number, then raise another quarter point at their May meeting. When the Fed did not raise interest rates I think there was a kind of a relief rally that started things up. We wound up the week with the NASDAQ stocks, the over the counter index, up almost 100. The Dow Jones Average was up 165.

I think this is just more of the churning I have been talking about. I am pretty convinced that the stair- step decline is over. However, we are going to be going through a period of churning that could easily last all summer long. It could go on to Labor Day, past Labor Day and toward to the election.

In the beginning the swings will be so wide, and there will be so much volatility that a lot of people will not realize that we have stopped going down. It will still be kind of painful for them.

Next week we have the Hambrecht and Quist Conference in San Francisco, which is the original brokerage firm technology conference. There will probably be close to 4,000 portfolio managers and analysts attending. There will be 300 or so companies.

Sometimes, some years, when the stocks have been doing extremely well this conference marks an interim top. Other years when the stocks have been doing badly, it depends how the companies are doing. If the companies are doing well, as they are this year, it can give people some confidence and let them get through the summer without aggressively selling.

It is going to be hard for people to come out of this conference negative because these companies are just enthusiastic. They are now at the point where they have enough visibility to commit to the second half of the year. They can say that it looks good. Most of them say that so far they have not seen anything that would indicate that 2001 is not going to be good.

In many companies business is accelerating because Windows 2000 was introduced and is now shipping.

Also, next week we will get earnings reports from Applied Materials and Cisco. They will both beat their numbers. Applied will beat its number by probably a nickel. Cisco normally beats its number by a penny. I would think it would do $.02 or $.03 this time, but there are some indications that business is so strong that they might not be able to hold it down either.

With the leaders like that, the kind of stocks that we own are going up. It could bring everything up.

I am working on the new issue of the newsletter and one thing I want to do now is adjust buy limits. I am going to be taking some buy limits down and up and down. I am not trying to tell you if you bought a stock and then I take the buy limit down that you made a big mistake.

I might be taking the buy limit down simply because other stocks have fallen that have become more attractive. What I would like to do is sort of have a distance between the current price of the stock and the buy limit as an indication of how attractive it is relative to the other stocks that are in Technology Investing.

There are a few that I am going to adjust right now.

Microsoft (NASDAQ: MSFT ) I am going to take from $85 down to $80. As I said, that is absolutely no indication that I think you should not own Microsoft or that you should back away from it at all. If you do not own Microsoft at this level you just not going to own this stock.

Chiron (NASDAQ: CHIR ) I am going to take from $50 down to $48, just a couple of dollars. It is well below that level, which is again, a sign that I think it is very cheap and it should be bought.

LSI Logic (NYSE: LSI ) from $65 down to $62. In that case I am also taking the target price up to $90.

Synopsys (NASDAQ: SNPS ) I am taking down from $54 to $50 even.

Some of these are just sort of reality situations. Synopsys is at $40, it got hit pretty hard, so I am just taking the buy limit down to $50. Obviously I think it should be bought all the way from $40 up to $50. I think it is pretty darn cheap at $40.

Taiwan Semiconductor (NYSE: TSM ) I am taking it from $59 down to $56. That closed Friday at $48, up a couple of bucks.

There is not a whole lot of news, but what there has been has been quite positive. I want to run through a few things that I have been looking at.

Comdisco (NYSE: CDO ) of course preannounced that they were going to have a good quarter so everybody raised their numbers from $.27 to $.40, which was well above the highest estimate. They reported $.42. They have a lot of strength in their basic equipment business. They have filed to take Prism Communications public. They could do that anytime if the market improves some. If we are in the kind of churning market that I am thinking we will be in, there will be days where IPOs can be done. Certainly Prism is a very hot area. They also go approval to file to take the tracking stock for Comdisco Ventures. My guess is that because of how hard the Internet has been hit that one will probably be put off until September.

On EMC Software (NASDAQ: E MCS ) reported $.30 on a $.29 estimate. Their revenue was up 22.9%. They are going to do a two for one stock split on June second. So, that is nice. We had our chance to buy it there under $130 and they have raised the stock for us

St. Jude Medical (NYSE: STJ ) announced they just completed the first implant of their new Integrity pacemaker. That is a beat-by-beat auto capture pacemaker that also has some very advanced rhythm detection circuitry.

MCI WorldCom (NASDAQ: WCOM ) is going to drop MCI, it is just going to be called WorldCom from now on. It will not change the symbol but you should know that they are about to do that. They had planned to do that after the Sprint merger closed but they are just going to go ahead and do it anyway. They are pretty sure the Sprint merger is going to close.

I think that is probably all I have for the moment. The next update on Technology Investing, next Saturday, May 13, I will try to give you a real flavor of what happened at the Hambrecht and Quist Conference.

Michael Murphy

-- posted by JackSwanson

Top 937. May 6, 2000 1:32 PM

» Rande - Karin,

Karin,

That’s funny…the same question came up in the following piece just yesterday (looks like a pretty good answer):

SACRAMENTO BEE, MAY 5, 2000

GM'S STOCK OFFER PUTS YOU IN ANOTHER INDUSTRY

BYLINE: Jack Sirard

BODY:
Q: I own 500 shares of General Motors common stock. Out of the blue, I get an offer from the company offering to exchange the shares for its Class H common stock. They have set a deadline of May 19. Is this a good deal?

A: In simplest terms, what you have is an offer by GM to trade its auto stock for its holdings in Hughes Electronics, the DirecTV satellite and communications company.

On Feb. 1, GM’s board approved a restructuring of GM’s economic interest in Hughes that included an offer to its current shareholders to swap their GM stock for about $8 billion of its Class H stock. In March, the board increased the exchange offer to $9 billion.

GM will issue 1.065 shares of Class H stock for each share of GM common stock. Based on Thursday's close, that represents a slight premium based on the closing price of $86.56 1/4 for GM common and $90.37 1/2 for Class H shares.

You need to decide if you want to be in the car business or the digital entertainment business. It's close to an old economy, new economy choice.

Under the circumstances, I'd go with the old GM. The company pays you a $2 a share dividend, or $1,000 a year, and sports a very value-oriented price-earnings ratio of 8-to-1. Hughes doesn't pay a dividend.

On Wednesday, GM stock dropped $5 a share when analysts from Lehman Brothers and Prudential cut their ratings on the stock, essentially saying that most of the good news for the future is already in GM stock.

However, a few weeks back Donaldson, Lufkin & Jenrette increased its earnings outlook for the stock after GM’s first quarter report topped all expectations. The brokerage house has a "buy" rating on the stock and that sounds good to me.

-- posted by Rande

Top 938. May 6, 2000 2:11 PM

» Rande - Barron's sure goes after Cisco in this week's edition.

Barron's sure goes after Cisco in this week's edition. Both barrels. Of more interest to me was the good piece by Gene Epstein, "Extremism Is No Vice When It Comes to Selling Books." He compares the extremely bearish "Irrational Exuberance" book to the extremely bullish "Dow 36,000" and comes up with some surprising similarities. Good quotes by Jeremy Siegel of "Stocks for the Long Run." Enjoy.

-- posted by Rande

Top 939. May 6, 2000 7:15 PM

» Rande - Major econ reports due next week include import prices, retail s

Major econ reports due next week include import prices, retail sales, PPI. What are the expectations? How's this for "rear-view mirror":

Retail sales .4%
Import prices -.6%
PPI Core -.2%
PPI Overall .1%

Hope so. CPI due out the day of the FOMC meeting should be equally benign. Meanwhile, there is some talk about how Greenspan might prefer a recession to mild inflation. The nicest word I can think of when hearing something like this is "ridiculous." Wishful bear thinking tainted by bias maybe, but not realistic. Greenspan may be many things, but he's not a sadist as far as I can tell. Forget about the market and whether you're long or not, recesssion means pain for millions. Let's get real. Greenspan will do whatever it takes to protect the currency, that's his job. But his goal is rightly one of a soft landing, not a painful recession. The guess here is that he would prefer to err on the side of mild inflation, not recession. His gradualist approach and willingness to give the new economy the benefit of the doubt for so long supports this view. All we can do, no matter what our investment philosophy and whether we agree with him or not, is hope he can manage it to his satisfaction.

So, what can we expect? The markets seem to be giving the FOMC all the leeway it needs for a 50 bp hike. In fact, as mentioned here last week, the markets may react negatively if they DON'T get it. Let's go one step further -- if we somehow get a 50 bp hike AND a shift to a neutral bias, then we may see the mother of all relief rallies. Could be too much to hope for. More likely would be no change in language as the FOMC waits to see what happens next. So, could be another 25 bp hike in June and could be May is it. All conjecture at this point and all depend on an economy that continues to defy conventional wisdom. One thing seems clear to me -- and it's only a matter of opinion -- there is nothing in the fundamental picture right now to remotely suggest a bear market in stocks. The only thing that could trigger a bear market, based on the CURRENT reality (things can change, mind you, and there is always the unexpected) would be an ARTIFICIALLY-induced Greenspan recession. Let's face it, it could happen. But is it already baked in the cake? Not by a long shot.

-- posted by Rande

Top 940. May 6, 2000 7:40 PM

» Rande - rich,

rich,

Sorry I didn't get to your question earlier. Yes, index funds are appropriate for deferred accounts too. In the best of all possible worlds, where the investor has assets in both taxable and tax-deferred accounts, it makes sense to use the tax-deferred accounts for the taxable fixed income portion of the portfolio, or for high-turnover or high-dividend paying investments that generate ordinary income. The reason is that everything that comes out of the tax qualified accounts is subject to ordinary income tax anyway so why waste precious space using assets that would be eligible for the more favorable long-term capital gain rate -- keep them in the taxable accounts. The asset allocation decision comes first, of course, and only then would you consider implementing between taxable and tax-deferred accounts in a tax-efficient manner. Having said all that, if most or all of the assets are in tax-deferred accounts to begin with, then forget about the tax efficiency nuances and go for what works best over the long haul -- index funds. In fact, after reading that excellent article from the JOA, maybe it doesn't matter either way. Maybe the passive way is best in any case. When you think about it, the two things that matter most over time are the two things we have greatest control over -- taxes and expenses. Nothing we can do about market performance, but plenty we can do to minimize expenses and taxes.

-- posted by Rande