Motley Fool displays selective memory loss

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September 05, 2004|By CHARLES JAFFE

IN THE LATE 1990s, Tom and David Gardner - the brothers behind the Motley Fool online investment community - regularly ridiculed mutual funds and the people who bought them.

Their key statistic back then was that nearly 90 percent of all funds failed to outperform the Standard & Poor's 500 index. Never mind that 98 percent of the indexes tracked by Morningstar failed to beat the same benchmark over the same time period. This was their proof that owning actively managed funds was a "wise" thing to do.

In the Motley Fool world, "foolish" is good and "wise" is dumb. The only fund that was "foolish" to buy - meaning "smart" - was a low-cost S&P 500 index fund.

Fast-forward a few years.

The market has been battered, but funds look a little better. Today, in hindsight, you can say that about one in four funds has beaten the S&P 500 over the past decade.

And that's why the Motley Fool created a newsletter this year for fund investors (the same class of people whom Motley Fool once derided as dupes and suckers) in hopes those fools (note the lower case) will pony up a $149 subscription to earn their capital letter and become Fools.

You knew the change of heart - or profit motive - was complete when the sales pitch for Motley Fool Champion Funds newsletter said: "Passive investing is too expensive. Too risky. Too unsatisfying."

But in promising you fund information with "No jargon. No spin. No snow," the Motley Fool is trying to spin away its past.

Investors should be smart enough to see through that.

This is hardly an all-out bashing of Champion Funds. The newsletter's content is quite good. The focus is on selecting funds that have low expenses, superior stock-picking and managers who have been on the job long enough to show that they can deliver the goods.

Aside from an obsessive comparison to the S&P 500 - which isn't the appropriate benchmark for all funds - you'll be hard-pressed to find anything in Champion Funds that experts would quibble with. What's more, Shannon Zimmerman, the former Morningstar analyst who runs Champion Funds, puts out time-tested, smart-investing messages, using the Fool's traditionally clever delivery.

But even that doesn't live up to the Fool hype machine's promise of something smarter than the rest of the pack. In fact, Champion Funds is simplistic enough that it can easily be replaced by services that are free or by newsletters with long records of picking funds well.

"The goal is to reward folks who do their homework over time by recommending funds which have what we think it takes to beat the market over the next three to five years," says Zimmerman.

For the investor who wants to do that homework, it's pretty easy to go to a site like Morningstar.com or LipperLeaders.com to screen funds based on low costs, returns, manager tenure and more. Premium memberships at these sites generally offer more sophisticated tools and analysis, as well as more detailed fund recommendations.

And if receiving a newsletter is particularly appealing, there are some - Sheldon Jacobs' No-Load Fund Investor or Litman/ Gregory's No-Load Fund Analyst pop to mind - with long records of superior fund-picking performance.

If the Fool's own contention is that manager longevity is crucial to proving greatness, shouldn't that apply to newsletter editor, too? Zimmerman may someday prove to be at the head of the class, but that day won't be tomorrow.

And while Zimmerman has been a fund supporter for a long time, the Fool as an organization has not been fund-friendly. When it comes to investment advice, consistency is crucial; the last thing you want is a 180-degree direction change from the people at the top.

Such changes generally have profit motives behind them, unless yesterday's thinking was wrong. Tom Gardner hardly suggested in a recent interview that he previously had been too hard on funds.

The Fool has hyped its brilliant ideas in the past, starting stock portfolios supposedly built on a better way of thinking, but which were buried when they fell short of expectations. Paid newsletters are relatively new for the company; they make good business sense - giving it away doesn't help the bottom line - but that doesn't make it right for consumers.

"They're asking you to forget their past advice that you should not buy mutual funds and saying instead that now you should pay them for advice on just how and why to buy them," says Jason Zweig of Money magazine, a longtime Fool critic. "It's a head-scratcher."

It sure is.

And even if the advice in the newsletter is good, investors should take the publication lightly and stick with more-established options until they're confident that the Fool really has changed its tune and won't go back to ridiculing fund investors the next time it suits business purposes.

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