Friday, May 10, 2013

At 15,000, who do you invest with? Or do you?

The Dow Jones Industrial Average (DJIA) hit 15,000 this week for the first time ever.  One main reason is that in the age of negative interest rates, there’s no other place for fixed-income depositors to go.  If they park their money in the bank, they lose because inflation eats their principal for lunch.  They want to play with house money, too.  The question becomes, who to invest with?  An ETF?  Or a celebrity hedge fund manager?

On 5/8/13 the Financial Times ran an illuminating article, “Tips from Wall Street hedge fund gurus fail to reward the faithful,” by Dan McCrum and Arash Massoudi where last year predictions from the managers were contrasted with simply passively tracking the DJIA with an index fund.  Two of the most high profile managers, Bill Ackman of Pershing Square and David Einhorn of Greenlight Capital, while successful, did not match the 22% profit gained by investing in an index fund.  Ackman focused on the underappreciated value of the retailer J.C. Penney, which turned out to be underappreciated for a reason: plummeting sales and profits.  The stock is down 37% since last year.   Einhorn made a good prediction on selling the yen against the dollar but his advice to sell shares in Martin Marietta Materials, “a building group boosted by government stimulus spending, would have lost 66% of their money.”
Hedge funds are not cheap.  You pay a 2% management fee and 20% of your profits.  In the meantime, withdrawals are capped at a few times a year.  My advice is: take the celebrities with a grain of salt.

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