Do not trust analysts and fund managers

People who are new to stocks often trust professional analysts and fund managers when it comes to their opinion about a certain stock. They think, that when fund manager Mr. X from “The X Superfond” buys the stock for his fund, it has to be a sure thing. Especially, if he talks about it publicly, you should be very careful, because that is the point when it gets dangerous. Let me explain a few things about funds to you, if you not already know the facts.

We as small investors are in a better position than we think. To buy a certain position takes weeks for a fund because they invest such large sums of money. That is a fact. Some funds have even such regulations, that they only can buy 10 stocks and every time they have to invest 1/10 of their fund. So if the market capitalization of a stock is 750 million dollar and the fund has to invest 50 million, you can be sure this will take some time. And what applies to buying also applies to selling. So if Mr. X says buy to us, he is almost possibly selling his position again.

One really annoying thing for fund managers is that they are measured by their performance. But not only once a year, but often even quarterly. We as long-term investor are OK with losses, because we know that the stock will be up in the next 18 months. But that is not enough for our fund manager. He hops from one hot stock to another praying for performance so he can keep his job. They are not interested in long-term performance, they are worried about the next 2 months when they have to show good results to their boss. They do not worry about the money, it is your money they spend, not theirs.

At last, funds have very strict regulations. Generally, funds are often to big to buy stocks from small companies with a small market capitalization. If they buy in, they would often simply double the stock. There are also regulations that for example a market capitalization below 500 million dollar is not allowed. Even if they would like to invest, they are just not allowed or much to big. Some restricted funds are also not allowed to buy foreign stocks or just invest in stocks listed in the S&P 500. But by this regulations they often miss great companies. That is also a reason why funds hardly ever outperform the market.

So grab your money and buy stocks yourself, you can do better than the professionals.

February 28, 2008 | Filed Under Investing

Written by Michael Szumielewski

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Take advantage of what you already know | Investing | World Financial Blog on March 3rd, 2008 4:13 am

[...] advantage of what you already know In my last article Do not trust analysts and fund managers, I pointed out how important it is to make own investment decisions. But how to find that perfect [...]

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