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  • Better investing through clichés

    Posted by Mitch Townsend on April 5th, 2006 (All posts by )

    Every dog has its day (trendy sectors)

    The popular financial magazines each have an article that they publish at the end of every year. This article lists the best and worst performing funds, and if you weren’t smart enough to put your money into it, that’s just too bad. But if you want to be really stupid with your money, buy into one of these funds as soon as you see the new list.

    The problem with many of these lists is that they are dominated by sector funds. These are funds that invest in a particular set of industries, such as health care and pharmaceuticals, precious metals, natural resources, real estate, utilities, and energy. What the list doesn’t tell you is how much of these spectacular gains were due to those industries’ performance and how much was attributable to the fund managers’ skill and insight.

    If you compare one year’s list to another’s, you will often find that there is a completely different list every year for the shorter periods (past year, past six months, past quarter). Events outside the fund managers’ control are responsible for much of the funds’ performance. For example, funds specializing in public utilities performed poorly in 2005 because of the increase in oil prices; funds investing in oil stocks obviously have done quite well in the same year.

    Even funds that are not explicitly described as sector funds may be heavily invested in a sector that did well for a brief time. Fund managers often have their favorite investments, and if this was the lucky year for that type of investment, the fund may have done well. Of course, fund managers may take credit for anticipating events and taking advantage of their insight. Long term, though, it is difficult to find any money manager who can consistently anticipate the market in which he invests.

    It may be true that every dog has its day; but when that day is over, it’s still a dog.

    This is part of an occasional series on investing. It is meant for the beginning investor and contains only general advice, not recommendations for any specific investment. Terms and conditions apply. Actual mileage may vary. May cause nausea, vomiting, hair loss, and a nasty rash. See program details for blackout dates, lease terms, and all-purpose weasling.

     

    One Response to “Better investing through clichés”

    1. Jonathan Says:

      So many journalists are clueless about statistical inference. Or maybe they just don’t care, since they are not paid according to the accuracy of their picks.