The Gadfly
Lessons for investors from 2001
Commentary: How quickly we forget
By Michael Collins, CBS MarketWatch, 12-20-01
SAN FRANCISCO (CBS.MW) -- This is the time of year when we look for wise men (and women), bearing investment tips. Magazine covers promise to tell us "Where to invest in 2002!" and investment bank strategists proclaim the proper asset allocation and soon-to-be-hot sectors.
It's hard to believe we're still buying this stuff. Don't we realize that these fortune-tellers have no bright star to guide them?
So, because I lack the wisdom and the self-confidence (and the crystal ball) to present my picks for 2002, the Gadfly instead takes an annual look back at some of the lessons investors can learn from the past year. Astute readers may note some amazing similarities with the lessons we should have learned from 2000.
Lesson No. 1 - It's your money, and you're the only person who only has your best interests at heart. Sure, there are good, smart people out there who can help, but in the end its you who will be enjoying the gains or suffering the losses - so be sure you understand your investments. That's not to say you shouldn't get professional advice - most of us need it. But no advisor can tell you with certainty where the market, or a sector, or a particular stock, will be at this time next year. Educate yourself, get as much good advice as you can, but in the end you need to understand and accept the risks you're taking with any investment. Just remember if you lose money, it doesn't come out of anyone's pocket but yours.
Lesson No. 2 - The "experts" can't tell you, with certainty, where to put your money. I don't care if it's the Wall Street analysts, the financial journalists, the lady on TV, your cousin the stockbroker, or your neighbor who watches CNBC all day - none of them have a crystal ball. Sure, they can make educated guesses. Sometimes they're right, sometimes they're wrong. Enron (ENE: news, chart, profile) was a sure thing at the beginning of 2001. We were nearly all fooled. The next time you're tempted to put full faith in an expert, think of the mutual fund managers, with all their research, who took big hits as Enron collapsed.
Lesson No. 3 - When it comes to mutual funds, you don't necessarily get what you pay for. Too often, high-expense funds, or those with significant sales loads, don't have returns that justify the expenses. Some expensive active managers do come up with spectacular returns, at least for a year or two. But how do you know which fund is going to be next year's big winner? (See lesson No. 2). Make sure you understand how much you're paying for your fund's management and marketing expenses, and weigh those expenses against the probability the fund will consistently out-perform others by at least the difference in expenses. Beating an index benchmark by 1.5 percent a year doesn't look as good if your fund is charging 2 percent annual expenses.
Lesson No. 4 - Check the board of directors. They are, after all, supposed to be representing the shareholders. They are supposed to make sure the managers are running the company right, and disclosing possible problems. They are supposed to make sure the auditors do their job. But too often they are really just working for the company managers. Again, Enron gave us a great example: several "outside" directors had lucrative contracts with the company separate from what they were paid to oversee the company as directors. Most people can't help but work for the people who pay them.
Lesson No. 5 - Good corporate governance pays. A study last year by Harvard economists Paul Gompers and Joy Ishii, along with the Wharton School's Andrew Metrick, found that companies that had strong shareholder rights had stock that outperformed companies that strengthened management's power. Advocates of good corporate governance and strong independent boards had long suspected this, but it's nice to have data from 1,500 firms over 10 years to back it up. Think of this study the next time you're asked to vote for an anti-takeover "poison pill" that management falsely calls a "shareholder rights initiative."
Lesson No. 6 - Regulators can only do so much, but shareholder voices must be heard. You can be sure the companies, the investment banks and the accounting firms are talking to the SEC and other regulators. When was the last time you sent a comment as an investor? Let regulators know what you think about accounting rules. Report bad advisors and brokers to the self-regulating organizations like the NASD. You may not get immediate relief, but you might contribute to a resurgent activist investor class - and they might start paying more attention.
At the end of last year, I wrote: "If we did learn our lessons this year, and we remember what we learned, next year is bound to be better."
Well, lets try again.
Michael
Collins writes on investor and consumer issues for CBS.MarketWatch.com. Comments
in The Gadfly do not necessarily represent the opinion of CBS MarketWatch.