Doug on the market

[Greg Nowell]

Doug advises index funds.  In fact if you graph some of
Forbe's winning funds against the S&P it comes out damn
close.  Forbes does take into account fees and
whatever, especially 12b-1 fees, management, and
taxes.   I think when some of the funds, like Nicholas,
shows up on the top ten list 17 out of 20 years that is
not an historical fluke.  But a fund which shows up as
a winner on the Forbes list will not show up as a
"market beater" on a last 1, 5, or 10 year list,
necessarily, since performance over specified time is a
different evaluation process than performance over
cycles (as specified in the Forbes model).   The Forbes
winners may not do as well on a list of past-5 year
winners, so part of what this issue raises is not
"beating the market" as such but definitionally what
constitutes "beating the market."

However, the ratings, as I have said, are for "up" AND
"down" cycles.  If you're with the S&P you get the
average of all stocks.  If you get into a Forbes fund
which manages itself to be good in down cycles you
limit the gut wrenching feeling of watching values
fall.  From what I have observed the funds rated high
for down performance actually do fall less on a bad
day, and rise less on a good day.  And vice versa.
Nonetheless,  since it is impossible to know when it is
better to be in an "up" oriented fund or a "limit the
down" fund (I'm talking long in low beta stocks, not
hedged), you will on average do pretty well in an index
fund which has both.

Some funds are so huge, like Fidelity's Magellan, that
they are in fact index funds, company claims to the
contrary notwithstanding.

--
Gregory P. Nowell
Associate Professor
Department of Political Science, Milne 100
State University of New York
135 Western Ave.
Albany, New York 12222

Fax 518-442-5298