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Monday, March 3, 2008

Index Funds Put the Fun in Fundamental Stock Investing

Next to Cat Fancy, I think The Economist is the best magazine on the stands. (Or "newspaper," as "Sir" would have it-- read the letters page sometime!) It's better-researched than anything, well-written, and even funny. And I think my mail carrier is reading my copy!

Usually I get it on Saturday, but this week's didn't arrive until Monday. The carrier had a mischievious grin on, too. I think he must have been jonesing on the Special Report all about asset management in this week's issue. It describes the radical changes in the mutual fund industry, explains hedge funds, demystifies some of the arcane jargon ("alpha" versus "beta"). Smart, smart, smart.

It also confirms what Bogleheads, those oddly-named devotees of John Bogle & Vanguard's indexing options, already know. Mutual funds are a loser's game, because you're paying for a fund manager who gets paid based on last year's performance, which may not be replicable. Even if the manager does well, taxes & fees will each up your profits. It's kind of scam, really.

Index funds just try to replicate the market. I have a core of my investments in Vanguard index funds, and then a (smaller) discretionary fund which I use for individual investing. Not at all sexy-- not at all something to boast about down at the club (if I were in the club!). But long term, it works.

And I feel smarter having read The Economist. Seriously, a couple of hours with this magazine is better than a week's worth of people yelling at you on CNBC.

How Your Business Can Help You Grow Your Cat

This article got me thinking. Hmmm. Does the door swing both ways? How to Grow Your Cat:

  1. Providing delicious vittles for her gaping maw.
  2. Reducing the need to keep in trim by outsourcing those laborious tasks.
  3. Changing the lifestyle to one more sedentary, in keeping with those issues of girth & mirth so bothering our nation's health policy-makers
Oh no! I suppose there's a reason the phrase "Fat Cat" has always been associated with business. Let's unpack it:
  • Given feline druthers, eating and sleeping top the to-do list. But when necessary, cats can be ruthless businessanimals, using high mark-ups and keeping margins down.
  • So on any given plot of land, a cat can quickly rise to the top of the local economy. After a low-key IPO (Initial Public [H]owling-- a UK term) all the forest creatures know who's the brand new boss in town. But once the competition's downed, it's easy to get lazy...
  • Worst of all, having a successful model has the danger of not developing further (notice I didn't say "growing"). Zooey might stop learning new skills and seeking new challenges-- at that point, as is sadly too often the case, feline diabetes can set in and wreck the health. And business health-- you cease to like your job, people work less hard, profits slowly decline. Then some Silicon Valley punk shows up with a new model and rips you to shred (it's happening in the newspaper business as we speak).
***

Meanwhile, the door seems to be swinging the wrong way in the economy. Ugh! Warren Buffet's one of the fattest of cats, portfolio-wise, so when he speaks we should all listen. I have been optimistic about the market, but perhaps I've been wrong (hard to admit, I'll admit).

Still, my hope is to stay the course somewhat. Half my portfolio's in index funds, so I have little to concern me there. They're long-term investments that seek to replicate the market; I just hope the market doesn't seek to replicate a busted toilet.

The other half, though, is individual stock investing. I have just a handful of positions-- less than ten-- and only one of my stocks got absolutely killed. But I believe in the company and their model, and want to hold on to it long-term. I'm waiting for even more of a pullback, in fact, before I act, though. We could have even more shrinkage...

Most importantly, on economic days like today, sit on the back porch and drink a mimosa. Really-- it's why we invest & save, right?