Mutual fund gurus: The battle of the books

There you are in the middle of the finance section of your local book store only to find a plethora of choices.

If you are looking for the easy way out to pick great Mutual Funds in Canada, you will find yourself among a half dozen of Canada’s Mutual fund Guru’s: Gordon Pape, Jonathon Chevreau, Ranga Chand, Riley Moines, Duff Young, and Richard Croft.

I have a very profound statement to make about the “easy way out” – it does not work! Many readers run to these books hoping to find fast answers. Realize the big dreams of making big bucks and the reality is that no one has this innate ability to predict the future.

Don’t get me wrong, I have a tremendous amount of respect and admiration for these authors. They are the few in this industry to put forth good research and good research will lead to good decisions. However, I also get very frustrated with their publications. Let me tell you why:

  1. Past Performance. Firstly, they spend all of their time looking backward and not looking forward. You try it and tell me if it works. Hop into your car, start it up, put it into drive but only look through the rearview mirror. You might get away without a scratch for a while but eventually, you’re in for a big surprise. This is precisely why the industry is so adamant about the disclaimer “past performance is no indication of future performance”. That being said, analysis of past data does help us understand the basic characteristics of mutual funds like how often they make money? How much will they fluctuate? How does the fund measure up in bull markets? How does the fund hold up in tough environments?
  2. Timing of Data. You know autumn is here when the mutual fund rating books flood into bookstores. Why? The timing allows you to buy these books for Christmas and the RRSP season. In order to get these books out on time, they typically use June 30 data for their impressive-looking charts and tables. So there you are Feb 28 ready to make your pick. You’ve bought all these books and meanwhile from June to Feb (only 8 short months ago, managers have changed, new funds emerged, old funds capped, mutual fund companies merged, markets have crashed, etc. You get the picture.
  3. High Turnover of Top Funds. For me, this is by far the most frustrating aspect of these mutual fund rating systems. As a practicing financial advisor, I buy all of these books every single year and read every word. Why? Because the information in the books helps me to make more informed decisions. However, if I relied on the results, I would find myself very confused. On one hand, they beat the drum of long term investing and the following year, their top fund’s changes by 30 to 50%. How can you have confidence when one year you bought a top fund for the long haul only to find that 12 months later, 45 different funds are being recommended?
  4. Same Book Different Year. Being a loyal buyer of all these books, I have also noticed that 80% of the time, they are simply repeating the same things they did the year before. Being an industry professional, that does not really surprise me since there are many principles for investing that will not change from year to year. What might change is the data, the economic environment and sometimes the opinions of these guru’s? I don’t know about you, but I buy books for knowledge. The basic notion of reading implies that you want to learn something. Yet these books are primarily marketing machines that train investor’s to be lazy and dependent on their results.
  5. Impractical Advice. One of the most comical aspects of these rating systems is the number of recommendations that are useless to most investors because they cannot take advantage of them. In one case, 10 top funds were recommended but 4 were closed to new investors, three demanded a minimum of $100,000 and one was only available in one province. I guess this is where theory and practice diverge into two different paths.

The moral of the story

As much as I think these shortcomings are important, I have respect and admiration for these gurus. They spend time researching and communicating their research to investors looking for direction. I urge investors to buy these books and read them because they will make you more knowledgeable. But remember three things as you expand your quest for knowledge:

  • No one can accurately predict the future! The mutual fund industry has little to do with perfection because it does not exist. Rather the industry is based more on probabilities and processes.
  • So don’t rely on any single guru. The principle of diversification stands the test of time. While we should not invest all of our eggs into one basket, we should also not rely on only one guru for the answers.
  • Understand the methodology. All these quantitative systems are disciplined and require a lot of work. While these books give you answers (and very different answers), the discrepancies lie in the process and methodology. If you understand the methodology and discipline, you will better understand why funds make the top list.

In short, there is something of value in each of these books on mutual funds but don’t expect these books to be the end all be all.

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