Intelligent Investor Ch.9 & 10 - Funds and Adviser

Investing in Investment Funds

The market for different kinds of investment funds is large, wrong, it's huge! 

Graham mentions some of these, open-end, closed-end, mutual funds, stock funds, bond funds, hedge funds, the list seems to be a never ending story!

The Investor, especially the defensive Investor, should answer three main questions before selecting any of these offerings:

1. How can the Investor choose a fund that assures better than the average result?
2. How can the Investor choose a fund that avoids worse than the average result?
3. Can the Investor make an intelligent choice of a fund?

The first statement that is made is that the "average individual who put his money exclusively in investment fund has fared better than the average person who made his common-stock purchases directly."

That doesn't mean that the fund is better than the comparable index. And that is descriptive later, where Graham mentions that the mutual-fund industry does no better than the market as a whole, or when he compared the Top 10 funds during his time with the S&P500!

A simple suggestion is to take the best past performing fund with a great track record and invest your money in that fund, assuming then that this will continue in the future? That evidence is according to Graham conflicting, as it seems random even amongst the top performers who will continue to perform above average!

The commentary chapter summarizes it very well:

• The average fund doe not pick stocks well enough to overcome its costs of researching and trading them
• The higher a fund's expenses, the lower its returns
• The more frequently a fund trades its stocks, the less it tends to earn

The Investor and His Advisers

There are several advisers in your proximity, the question if you should listen to them. They reach from a friend, your local bank man, brokerage firm, financial service firm, or investment counselor, etc.!

Graham's basic thesis is:
"If the Investor is to rely chiefly on the advice of others in handling his funds, then either he must limit himself and his advisers strictly to standard, conservative, and even unimaginative forms of investment"

If an investor is prepared to pay a fee for an adviser, he may wisely select some well-established and well-recommended investment council firm or similar but without expecting higher results than average! You should be careful of all persons that promise spectacular income or profits.

The Defensive Investor will most probably not be equipped to pass judgment on the recommendations of securities - but they surely can state the kind of what kind of securities they want to own! As we learned in the previous post here, the selection is between a portion of high-grade bonds and common-stocks of leading companies at certain price levels. Every good adviser can make up such a list, but so can you, especially with guidance in the previous post!

The Aggressive Investor will be active and will want to understand the adviser's recommendation in detail. But equally importantly, it should pass all of his own standards and judgments! That means that the investment that is proposed should be understood by the investor reflecting his own knowledge and experience!

The commentary chapter has a great title who summarizes it well: "Do you need help?"

So the answer, in my opinion, if you read the book and follow the advice, is a big NO! You can use an adviser, but you don't need it!