They Said the Darndest Things

When I moved from London to New York City in 1986, I didn’t have a job lined up. But after a panicked search, I landed a position at Forbes magazine—as a so-called reporter, the title given to lowly fact-checkers. Almost two years later, I escaped that drudgery when I was promoted to staff writer and assigned the mutual-funds beat.

At the time, the fund world was a cesspool of dubious practices and misinformation, which was bad for investors but good for curious journalists. Here’s just some of the nonsense that was regularly spouted by stock brokers and fund-company executives:

“Don’t worry about fund expenses because they’re already reflected in returns.” What about the notion that fund expenses are the biggest driver of relative performance within any one fund category? That idea was rarely discussed, even among fund cognoscenti.

“Load funds perform better.” There was no proof for this, and yet brokers regularly repeated this lie.

“To find funds that’ll outperform the market, start with those that have strong five- and 10-year records.” Even though the warning label said past performance was no guarantee of future results, almost everybody—including me—assumed historical returns did indeed foretell the future. Even today, many folks rely on past performance when picking funds. It’s perhaps the most enduring mutual-fund myth.

“If you want good results, don’t constrain what fund managers can do.” In the late 1980s, investors started questioning the high portfolio turnover at some funds, or how they made big taxable distributions, or how some managers bought pretty much anything they wanted, rather than following a consistent investment style. This was dismissed as foolish talk that would result in poor fund performance. Today, by contrast, fund managers are more carefully monitored—because it’s widely acknowledged that high turnover and tax inefficiency hurt fund investors, and that style drift can result in investors owning funds that are radically different from what they expected.

“You buy the fund, not the fund manager.” The late 1980s saw the rise of the star manager, notably Peter Lynch. But in 1990, Lynch retired, while other star managers started jumping ship to competing money-management firms, where they could earn bigger paychecks. To slow the resulting exodus of investors, fund companies would claim a fund’s record should be attributed to the fund, not the manager, and would cite things like the firm’s research department or its culture. All this was disingenuous: Many fund companies would cheerfully publicize their best-performing managers—right up until they left.

“When fund investors are buying, it’s time to sell.” Long scornful of everyday investors, stock brokers and other Wall Street denizens would chortle about the ineptitude of mom-and-pop investors, and how they always tended to buy and sell stock funds at the wrong time.

As I’ve often noted, Coca-Cola and Ford Motor don’t belittle their customers, and yet Wall Street employees have no such qualms. Is their scorn justified? Yes, many amateur investors end up lagging far behind the stock-market averages. But that’s also true of many professional money managers. Should we also heap scorn on them?