Economics & Finance

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.

Just about any event will cause the price of gasoline to rise here in the United States. Hurricanes, terrorism, the occasional election scandal. It all causes the price at the pumps to jump for a time.

Rioting is becoming a national sport in France, as is arson. So how come the rioters can still afford to buy gas? Wouldn’t the laws of supply and demand dictate that the price would skyrocket considering how much has been used to create such pretty yet smoky light?

And what about the cost of automobiles in France? It could be that the price actually dropped due to volume. The auto companies have to produce more cars in order to replace the ones destroyed by the “protesters”, and the number of people who can afford to buy a new car must be dropping, so did the cost go down?

Just wondering.

My post below generated a lot of comments after Instapundit and FreeRepublic inked to it. Reading all the comments provoked a few thoughts:

(1) A lot people don’t understand that free-rider is a term of art within economics. Its a technical term, not a pejorative. Free riding is an economic effect, not a choice. In this context, there are many people who are eager to assume the burdens of child rearing but for a variety of reasons cannot. Morally they are not free-riders but economically they are. Every working person contributes to the economy to the benefit of everyone, but a free-rider problem occurs when a subset of the population shoulders the cost of a resource that is communally shared. I argue that is what has happened with child rearing.

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Economically, every society needs children.

Children are the producers of the future This means that children are in a sense a necessary economic good. [Update: I mean “good” in the sense of a created product like steel, not in the sense of a positive or negative] A society that does not produce enough children, or that cannot produce enough children who grow into economically productive adults, is doomed to poverty. Every long-term investment we make, whether in the private or public sector, is predicated on the idea that there will be a future generation which will actually produce a return. It doesn’t matter what economic or political system rules the present, it will need children to secure its future. Even the most self-centered individual would eventual realize that if the next generation cannot produce, his own welfare will suffer.

So, collectively we all need children and benefit when they grow into productive adults, but the cost of raising children is increasingly being borne by fewer and fewer in the general population.

Childless adults are rapidly becoming economic free riders on the backs of parents.

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In “Rich Man’s President? Look Harder”, David Mastio looks at family income stats from the Federal Reserve.