Drawback for managed funds: Management
THE MOTLEY FOOL
How do mutual funds work? – J.R., Pueblo, Colo.
They feature the pooled money of many investors that is managed by a company of professionals. Mutual funds make sense for most people, since few of us have the time or skills to choose investments carefully. Instead, we can tap the services of pros, who will increase our wealth for a modest fee. At least, that’s how it’s supposed to work.
There are many kinds of mutual funds. Some invest just in stocks, others in bonds, and some in both. Some focus on large companies, others on small companies, and others on a mix. Some seek income through dividend- or interest-paying securities, and others aggressively seek fast-growing firms. Some specialize in one industry (such as energy or biotechnology) and others in a region (such as Africa or Latin America).
Unfortunately, many professionally managed mutual funds don’t do so well for their investors because of hefty fees or manager problems, such as poor investment choices or a counter-productive focus on short-term results. To combat this, it makes a lot of sense to just opt for broad-market index funds, which tend to have very low fees and invest only in the stocks of major indexes, such as the S&P 500. Over the long run, these have outperformed most managed, nonindex funds.
Learn more about funds at www.fool.com/mutualfunds/mutualfunds.htm
and research them at www.morningstar.com. Also, check out our recommended funds via a free trial of our “Rule Your Retirement” newsletter at www.ruleyourretirement.com
Where can I learn about Real Estate Investment Trusts? – A.M., Butler, Pa.
Try “Investing in REITS” by Ralph L. Block (Bloomberg, $28). REITs are worth considering, as good ones can pay hefty dividends.
MY DUMBEST INVESTMENT
Years ago, two friends in the oil business introduced me to a possible investment – in an oil partnership. I’m a geologist, so I researched the wells and reports and was confident it was going to be very profitable. I sold $48,000 worth of Exxon stock and bought in. After receiving a few sizable monthly checks, the cash flow began to diminish. The barrel counts were fairly consistent, but excuses were offered for the reduced payouts
until the receiver took over.
Yes, brother Ponzi had had his way with me. I had certificates of ownership issued by the state of North Dakota, but several others had the same serial numbers on theirs! I received a compensation check from the Treasury for a whopping $25. Had I kept those Exxon shares, they’d be worth more than $380,000 today! – M.J., Los Angeles
The Fool responds: Such ventures are often very speculative. Though they look promising, there’s little you can count on. And if crooks are running the show, you’ll really be in trouble. Stocks might seem less exciting, but at least their financials tend to be audited.
Founded in 1899 in Pennsylvania as a mitten and glove company, today I’m a $10 billion enterprise and the world’s largest apparel company. You may have heard of some of my brands: Wrangler, The North Face, Lee, Vans, Nautica, 7 For All Mankind, Eagle Creek, Eastpak, Ella Moss, JanSport, John Varvatos, Kipling, lucy, Majestic, Red Kap, Reef, Riders and Splendid. I’m growing rapidly abroad. My name, now abbreviated, used to evoke a famous work by Thackeray. My stock has gained an average of more than 14 percent annually over the past 20 years. Who am I?
Last week’s trivia answer: You might not have heard of me, but I’ve been around since 1818 (almost 200 years!) and I’m valued in the stock market at roughly $11 billion. I was founded in Amsterdam as an import/export trading company. Today, based in New York, I’m a food and agribusiness giant, employing some 32,000 employees in more than 30 nations. I deal in oilseeds, grains, sugarcane, wheat, corn and fertilizers. I process and transport them, serving the food service, farming and biofuel industries, among others. I make margarine in Europe, and process soybeans in China and oilseeds in Brazil. Who am I? Answer: Bunge
THE MOTLEY FOOL TAKE
Ford is making money hand over fist and gaining around the world. Solidly profitable General Motors is the China sales king and is investing heavily in a new lineup of products. And Chrysler has just returned to profitability with help from partner Fiat.
As key competitors Toyota and Honda reel from the effects of the Japan disaster as well as problems of their own making, each of the once-Big Three are thriving – despite a U.S. auto sales rate that remains well below pre-2008 levels. So how do you feel about those auto bailouts now?
While Ford didn’t need the kind of aid that GM and Chrysler got, it nevertheless benefited from the bailouts. If its rivals had collapsed, many of Ford’s suppliers might have followed suit.
The bailouts helped make possible one of the great turnarounds in business history. They also kept hundreds of thousands of Americans employed, preventing a bad recession from becoming something worse.
But will we ever be paid back? Yes – and maybe. Chrysler is aiming to pay off its loan soon. General Motors has technically paid its loan back in cash and stock, but a higher stock price is needed for Uncle Sam to break even.
The Buffett and Munger Show
In late April, around 40,000 Berkshire Hathaway shareholders flocked to Omaha, Neb., to listen to Chairman Warren Buffett and his partner, Charlie Munger, answer their questions for five hours.
Here are some snippets from the annual meeting, paraphrased:
• On America’s future: The potential of America has not been used up, but the rest of the world is starting to catch on. Over the next 100 years, we’ll have 15, maybe 20, lousy years, but we’ll end up far ahead of where we are right now.
• On railroads: They should have a good year, as they’re becoming more competitive economically.
• On attractive sectors: Buffett and Munger would both invest considerable time learning more about technology companies if they had many more years ahead of them. Energy, too.
• On gold: They remain rather bearish on commodity investing in general, viewing it like this: You buy and hope that someone else is willing to pay more for it later. Take all the gold in the world, put it together in a cube. You can climb on it, fondle it, polish it, it isn’t going to do anything.
• On index funds: Buffett thinks most people would do well to buy broad-market index funds (such as those based on the S&P 500 or the total stock market) if they’re going to invest consistently over time.
• On taxes: Munger noted that hedge fund managers in America are getting lower tax rates than physics teachers. “That is demented.”
We’ll offer more nuggets next week. In the meantime, read Buffett’s educational letters to shareholders at www.berkshirehathaway.com