Old West provides new code for funds

Your Funds

February 27, 2005|By CHARLES JAFFE

When it comes to mutual funds, too many investors have an attitude of "Shoot first and ask questions later."

They pick a fund largely on the basis of recent performance and with insufficient data about how the fund and its manager operate. They are taken in by dreams that past results will be repeated, and they trust too quickly in the image a firm creates in advertisements and marketing documents.

They might have had an easier time if they lived in the Old West.

In his recent book Cowboy Ethics: What Wall Street Can Learn from the Code of the West, veteran money manager James P. Owen talks about how investors have confused rules with principles and how the financial services industry needs less regulation and more inspiration.

The Code of the West, as presented by Owen, has lessons in the way an investor should act, as well as what an investor should expect from the fund companies he takes on as hired hands to manage money.

The Code of the West:

1) Live each day with courage.

This is not so much about physical bravery as it is a moral strength of character.

For an individual investor, living with courage means facing up to mistakes, rather than allowing them to fester, acknowledging areas of weakness and finding help to attend to those issues.

For an investor looking at a fund company, you want management that is unafraid of telling you what went wrong, rather than always focusing on what they think will happen next. Too many managers discount the experience you've had in their fund, hoping you will stay focused on the future.

2) Take pride in your work.

"Cowboying doesn't build character; it reveals it," Owens notes. The same can be said for running a mutual fund.

A money management company should never be taking actions it can't be proud of, and an investor who sees a fund firm that has something to be ashamed of might want to look for firms that have never had such problems. As the scandals begin to fade toward memory, investors should not forget that lesson.

3) Always finish what you start.

Many fund managers change tactics when things don't go well, which is a problem if they start drifting and altering the focus of a fund.

No investment journey stops in the middle. Investors need to find a plan - and managers - that they can trust and then have the courage to stick it out.

4) Do what has to be done.

For individual investors, living up to this part of the code might be toughest, because everyone wants the easy way out. That's the shoot-first mentality that leads people to buy yesterday's winner and then be perplexed when it starts losing.

But it also involves putting your investments in a position to succeed.

Those who belong to the huge group labeled "Americans who aren't saving enough" need to recognize that if they don't reach their investment targets, it's not necessarily the fault of the money managers who were given a paltry portion of income to work with.

The bull market of the 1990s showed the danger in "letting the market be the savings plan," as the extra returns of the good years evaporated when the bear market arrived.

5) Be tough but fair.

Investors often hold their funds to unreasonable standards, jettisoning a good fund because it rides with the market during a down cycle.

Having high expectations is fine as long as those expectations are based in reality.

Too many investors have an attitude that says, "I can stomach risk, just so long as I don't lose any money," and they fire managers whose primary fault was simply participating in a down market.

Charles Jaffe is senior columnist at MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, Mass. 02025-0070.

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