Driven by a combination of management-initiated efforts to improve defined contribution plans and increasing employee bottom-up requests for a wider array and range of investment options, the average number of choices offered by Benefits, Inc. clients is now 10, compared to 3 or 4 choices 10 years ago. Indeed, many large companies offer 75 or more options. However, a concern is whether these additional options are being used properly. Read the rest of this entry »
Earlier this year, two mutual fund management companies, American Guardian, Inc. and Best Management, Inc. entered into an agreement under which American Guardian would purchase all of the issued and outstanding stock of Best Management and merge Best Management into American Guardian. Although the companies are now combined, there are still two separate boards of directors for the funds. Each fund complex retained the same independent board members previously elected by the shareholders, but company-appointed directors were reevaluated and will be consistent for both boards. The combined entity, Best American Management, is now in the process of reviewing existing products and services and looking for opportunities to leverage its increased size.
American Guardian was a 30-year old Boston-based mutual fund complex. This fairly staid, conservative company was well known but had not been particularly innovative in fund distribution or shareholder servicing. It had historically chosen to distribute mainly through broker- dealers and outsourced its transfer agent process. The relatively new CEO of American Guardian firmly believed that in today’s highly competitive environment, mutual fund complexes must “grow or die.” He saw an acquisition as a necessary step to ensure that his firm’s products and services would be attractive to investors and their advisers in the future. Read the rest of this entry »
The Class B structure creates challenging financial issues for the fund sponsor This structure carries inherent risk in that the fund’s NAV could decline substantially, decreasing the amount of 126-1 fees and CDSCs received by the sponsor, possibly below the amount it advanced to the broker-dealer. This is especially a risk for an equity fund sponsor, since equity assets are more volatile than other asset types. In recent years, many fund sponsors have sought relief from the risk that the CDSC arrangement entails by taking advantage of new methods of financial engineering developed by banks and investment banks. These methods enable fund sponsors to reduce or eliminate this risk by securitizing and selling the future cash flows from 12b-1 fees and CDSCs. For example, consider a fund sponsor that has just paid a broker a 4% commission for selling Class B shares of a growth find. Rather than wait to recoup this commission via 12b-1 fees and/or CDSCs, the sponsor may sell the rights to these future cash flows to an unrelated party in exchange for a modestly lower payment today. This sale effectively protects the sponsor against the risk associated with a possible downturn in the equities market and consequential decline in cash flows from 12b-1 fees and CDSCs. Read the rest of this entry »
Over the past few years, the merger activity in the mutual fund industry has sharply accelerated. Some of the mergers involved fund companies trying to fill out their line of products. An illustration is the acquisition of Templeton’s management company, which has a strong reputation for international stock funds, by Franklin’s management company, with its heavy emphasis on bond funds. Other mergers involved institutionally oriented securities firms seeking more distribution to retail investors. An illustration is the acquisition of Dean Witter, a retail wire house, by Morgan Stanley, with its institutional client base. Still others involve banks that want to gain a foothold in the mutual fund industry. An illustration is the acquisition of Dreyfus, an investment manager for a broad line of mutual funds, by Mellon National Bank. The following case study discusses several mergers in the mutual fund industry and the early results of the consolidations. Read the rest of this entry »
The SEC heavily regulates mutual funds and their advisers with respect to most aspects of their business. In their role as investors, mutual funds are subject to a variety of restrictions on how much stock of a particular company or industry they may own and how liquid their aggregate holdings must be. Every fund must disclose its complete holdings twice a year in reports to fund stockholders, and any fund adviser managing more than $100 million in the aggregate from all accounts must disclose quarterly a total list of equity securities owned by the funds and other accounts managed by the adviser. In addition, if the funds and other accounts managed by the investment adviser hold more than 5% of the voting securities of a publicly traded company, the adviser must file periodic disclosure reports with the SEC on such holdings. These filings are a source of valuable information on mutual fund holdings for participants in takeovers and proxy fights. Read the rest of this entry »
This article has been compiled with the help of Arthur Andersen, particularly Victor Levy of Arthur Andersen’s Financial Services tax practice in London. It covers the taxation of futures funds and derivatives in a broader sense for the leading European markets. The author would like to thank him and the European offices of Arthur Andersen for their help.
In Belgium, the law of December 1990 regulated in an extensive way the status of investment funds (initially covered by the law of 1957) and created two new types of investment companies: the SICAV and the SICAF. The SICAV is the société d’investissement a capital variable, while the SICAF is the société d’investissement a capital fixe. Read the rest of this entry »
The SEC heavily regulates mutual funds and their advisers with respect to most aspects of their business. In their role as investors, mutual funds are subject to a variety of restrictions on how much stock of a particular company or industry they may own and how liquid their aggregate holdings must be. Every fund must disclose its complete holdings twice a year in reports to fund stockholders, and any fund adviser managing more than $100 million in the aggregate from all accounts must disclose quarterly a total list of equity securities owned by the funds and other accounts managed by the adviser. Read the rest of this entry »
This one is simple. Don’t invest with vengeance in your heart or any heated emotion driving your decision-making. Wrath, envy, and vanity are three of the sins that can cause you to invest in highly emotional states. You need to be aware of your emotional temperature when considering an investment, and if you find yourself upset, thinking about getting revenge, or furious at friend, foe, or the investment vehicle itself, give yourself a time out for a day or longer. Calm investors have a far better track record than highly emotional ones, and you need to keep this in mind or you’ll become even angrier when your hot-tempered investment doesn’t pan out.
Thou shall not commit adultery chasing some flashy little stock of the moment.
As much as I repeat this commandment, I know that daily price movements seduce people into betraying their long-term commitments and go for the most attractive investment at that particular moment. To Put it more bluntly: Don’t buy something just because it’s “hot.” Once you recognize that it’s hot, you’re probably already too late. Force yourself to think long-term, even when you’re tempted by what seems to be a short-term sure thing.
Anger becomes a deadly investing sin when it isn’t managed. Anger in itself isn’t a problem; the actions it prompts you to take, though, can cause major losses. To help you prevent these losses, here are two sets of tips. The first relates to monitoring your investing moods; the second involves avoiding specific, anger-induced investing mistakes.
Mood Monitor
If you’re vulnerable to the sin of wrath, you need to be vigilant for signs of anger in all its forms when you’re contemplating your investments. Be alert for the following emotions and take the suggested precautions if you spot them:
1. A red-hot desire for vengeance. You want revenge against the market in general or a broker who you feel gave you bad advice or the media for ruining a great investment. When you’re contemplating a given investment, all you can think about is how the “enemy” will rue the day they crossed you. Your goal is not financial as much as it is that sweet feeling of defeating your adversary. Read the rest of this entry »
To a certain extent, all investors react to good or bad news regarding the market. Investing gluttons, however, overreact. They are so hungry for action, they respond to the rumor of a merger or the hint of regulatory move by buying and selling. They become so worked up at the hint of bad news involving a stock they’re holding that they reflexively sell; they become so eager for profit at possible good news that they immediately buy.
The irony is that these gluttons think they’re getting a jump on the market, but in reality, they’re lagging behind it. Stocks can often move before the first trade by 5 percent on good or bad news. As a result, investors that use good or bad news as a trigger for a trade usually are dealing with unfavorable price movement. They deceive themselves into thinking that by reacting quickly to a news report about a stock or a broader economic trend, they are going to get a jump on other investors. In reality, they are lagging behind the market as well as other investors who make less frequent but more strategic investing decisions. Read the rest of this entry »
Are you actively looking for the next Dell? Do you want to find a stock that is under $1 a share (as Dell was, split adjusted, prior to 1996) and ride it to $50 (which Dell reached in 2000)? If this is what your goal is, you are better off studying gambling techniques and visiting a casino. Trying to make a killing causes you to invest in stocks that carry a lot of risk and that have relatively low odds of rewarding the risks you take.
If you feel the urge to make a killing and you’re particularly vulnerable to sins such as greed and gluttony, here is a good way to follow this commandment. Tell yourself that if you want to make a killing, rather than searching for a rags-to-riches stock, your money would be better spent by taking a risk on:
- Opening a restaurant
- Starting an Internet grocery store
- Buying real estate
- Buying swamp land in Zimbabwe
I’m not suggesting you actually do these things, only that you should consider them and then realize how much risk is involved in trying to make a killing in the market.
When your neighbor, friend, relative, or colleague makes a bundle through investing, remind yourself to manage the envy you naturally feel. If you don’t manage this envy, you’re likely to copy his strategy or type of investment. It’s possible (though unlikely) that copying it may be effective in the short-term, but it is no way to meet long-term objectives.
Viewed without any context or history, a buddy’s great investment is not always what it appears. He may have been investing in food-related companies for years without much success, but he happened to be holding one food company stock that shot skyward because of some hugely successful product introduction. You are not privy to the years of futility as he pursued this approach; all you see is that a food company investment paid off handsomely. If you try and duplicate his “strategy,” you’re doing so without seeing the whole picture. If you possessed this broader perspective, you would never attempt to use his flawed approach.
Diminish your fervor to copy other successful tactics and techniques by asking your neighbor or colleague the following questions: How long have you had this particular investment? How has it done over the last three years? Have you ever had a similarly spectacular success in the past ten years? Have you been disappointed by your investing approach over the last five years? How were you disappointed? The answers are likely to make you less covetous.
To help you manage the three secondary sins just mentioned as well as the seven major ones, I’ve put together a list of ten things you should and should not do. They compliment the sins, in that they are action items as opposed to “warnings.” Just as the ten commandments of biblical fame suggest ways to avoid the seven sins, these commandments function in a similar manner. Keeping a list of these commandments handy next to a list of the sins should provide you with the model you need to maintain your virtuous investment path.
Let’s look at each commandment and how to obey it:
- Thou shall not convert thy neighbor’s investment
- Thou shall not make a killing
- Know thy investments better than thou know thyself
- Thou shall not make unto thee a graven image of profits
- Thou shall not take the name of the Lord in vain or issue nay foul-tempered oaths while investing
- Thou shall not commit adultery chasing some thy little stock of the moment
- Honor they mother, thy father, and the market in good times and bad
- Thou shall not steal from thyself by forgetting about taxes
- Thou shall not worship false idols or deceitful financial advisors
As we noted, angry investors sometimes lack a specific target and disperse their anger over the market in general. They rant about the market’s cruelty and indifference, and it is like ranting about fate. Many times, though, investors focus their anger on a specific person, group, or event. In some instances, this target is worthy of their ire—a CEO made a bad decision that negatively affected the stock price. In other instances, however, investors made mistakes and set up targets as scapegoats—they blame others for their oversights and lack of due diligence. Understanding what the common targets are and how they trigger our anger gives us a weapon to defend ourselves against it. Keep the following targets in mind the next time you find yourself furious at them for an investing loss: Read the rest of this entry »
It may be that as you look at the previous section and clearly identify yourself as a greedy rather than as a realistic investor, your response is, “So what?” You may rationalize this investing behavior as crucial to your success. You are aggressive, confident, and willing to take risks; you made a significant amount of money in the market in the past, and you intend to do so in the future, and the only way you know how to do so is by thinking big and investing like a big-time player.
In fact, big-time investors are big-time precisely because they aren’t greedy. They are highly successful because they understand the way the market works, do their homework, analyze their options carefully, and then make decisions with both short-term and long-term results in mind. The greedy investor, on the other hand, gets into all sorts of financial trouble because his greed is based on an unrealistic view of the market. Read the rest of this entry »
Greed is one of the most difficult sins to manage because it is always there. We invest to make money, and every promising investment raises the possibility of making a significant amount of money. We wouldn’t be human if part of us didn’t dream a bit about what might be. Good investors, though, keep that part of themselves in a controlled, isolated environment. If you are particularly vulnerable to the sin of greed, you’ll do likewise. Specifically, you’ll do some or all of the following:
- Invest slowly, knowledgably, and logically. Speed, ignorance, and reflex are the greedy investor’s enemies. Force yourself to move relatively slowly before making an investing decision, even when you’re certain that even a moment’s delay could cost you thousands. In the vast majority of cases, delaying your decision for a short period of time won’t hurt. In most instances, it helps because it gives you a bigger window of time in which you can think, reflect, learn, and talk about an investment. Greed preys on people who just react. When I say invest knowledgably, I mean do your homework. Learn about the fund’s or stock’s performance historically. Compare the fund or stock to the appropriate index or benchmark. Read as many reports as you can related to the investment. Don’t worry that your delay makes you spend an extra 50 cents a share because in the long run it won’t make a difference. Finally, logical investing means reasoning out your investment decision. When you hear a great tip or read something that makes you believe you’ve found a great fund that will make you millions, step back and write down the logical steps that have led you to this conclusion. Specifically:
Read the rest of this entry »
As you’re reading this, you may think to yourself, “I’m never going to commit this sin.” Everyone thinks this thought. When you’re reading about other people, their lustful investing behavior seems completely irrational. In the heat of investment decision-making, however, lust can hit you when you least expect it. Certain situations present themselves and rational thought takes a back seat to the moment’s infatuation. It pays, therefore, to be alert for the following situations where you’re most vulnerable to lustful investing:
There are all sorts of direct and indirect messages that make you feel your company stock is going to perform better than any other stock. You observe that your organization is extremely well-managed, that the company has great products and services and that its leaders are inspirational and honest. As our WorldCom example illustrated, it is not unusual for people to invest their entire retirement funds in their own company stock. You may receive stock options and other incentives to buy the company stock, and your boss or some other executive may assure you that it’s the best investment you could possibly make. In some cases, management may apply pressure for you to invest in the company and they may monitor your equity holdings. For some people, it feels disloyal to invest in any other company’s stock.
If this describes your investing, I don’t want to suggest that you’ve been brainwashed, but you certainly have been smitten. Why else would you entrust your livelihood and your life savings to one company? As great as your company’s management may be, people change companies. As wonderful as your company’s products are, new products with new technologies render established products obsolete. Read the rest of this entry »
As you read through the descriptions of the sins and the accompanying monologues, it’s likely that you had an inkling of the ones to which you are most vulnerable. You may have found one or more than one, seeing your own investing behaviors in the descriptions. While it’s important to be aware of all seven sins—most of us fall victim to all of them during the course of an investing lifetime—pinpointing the sins that are most likely to hurt your investing performance is key. To help in doing this, I keep a journal of my trading activity. In the journal, I note where and when I first heard of a particular company, what research I did into it, the reasons behind my decision to buy it (or not buy it), why I sold it, and so on.
To help you pinpoint your vulnerabilities, I’m going to list some common investing mistakes and the specific sins that catalyze these mistakes. As you’ll see, more than one sin can cause some mistakes, so you won’t always find a one-on-one relationship between mistake and sin. Still, this exercise will help you hone in on your vulnerabilities, narrowing the list down from seven to one, two, or three. Read the rest of this entry »
Realistically, greed is such a powerful force at times that it’s difficult to find that coolly rational place that allows you to stop your investing reflex. You come across a stock that you’re convinced is going to take off, and you feel every second you delay represents many dollars lost. In these situations, it’s all you can do not to sell the house and use the proceeds for this investment.
Developing a disciplined mindset can help you deal with these tempting situations. By disciplined, I mean you must be in a highly conscious, analytical state when you make an investment decision. Even as your greed is pushing you to rush forward or buy more, your discipline provides you with more rational alternatives. How do you develop discipline? I’ve suggested a few techniques earlier, such as imposing a 5 percent limit and gathering sufficient information before acting. Here are some additional ways to do so:
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USE A METHOD OR A PROCESS BEFORE MAKING AN INVESTMENT DECISION
Whether it’s going through a mental checklist of things you need to do before taking action or employing a series of questions that must be answered to your satisfaction, a process ensures that you won’t act based only on an overwhelming desire to make money quickly. Read the rest of this entry »
Here the problem is lusting after a given investment even before it has proven its worth. For many reasons, people get it in their heads that a stock or fund is going to take off, and they buy too much too quickly. It is like falling in love at first sight. Suddenly, they have a singular focus and ignore everyone and every thing besides this one object of lust.
For instance, you subscribe to an investment newsletter, and you swear by it. In recent months, it has been right on the money with its recommendations, and it seems as if the newsletter author has the inside track on the market. Perhaps you recall George Gilder and hi Gilder Technology Report. People made a great deal of money in the late 1990s investing in the tech companies Gilder recommended. In fact, hi; picks were like self-fulfilling prophecies: If George picked it, the stock would invariably rise. Of course, by late 2000 just about all the tech stocks went down and people who took Gilder’s recommendations as gospel lost a lot of money. Read the rest of this entry »
