MSNBC – In an article last year, Slate.com writer Daniel Gross tackled why so many investors fare poorly in mutual funds, expounding on a study by economists Andrea Frazzini of the University ofChicago Graduate School of Business and Owen Lamont of the Yale School of Management. He started out by explaining that there’s smart money, represented by “big-time hedge fund managers,private-equity honchos,” etc., and dumb money, represented by … us, individual investors.
I find this a bit too simplistic. While there are indeed smart and successful hedge fund managers and others, they don’t all have such great records. And I’ve met or read about too many successful small-time investors to consider them dummies.
Gross went on to make some good points, such as: “But as a class, mutual-fund investors are short-term return-chasers. If a fund puts up good numbers for a few quarters, it will attract lots of new cash. ‘Individuals tend to transfer money from funds with low recent returns to funds with high recent returns, [Frazzini and Lamont] note.'” I’ve not only seen this happen, but have done so myself. It’s natural to look for great places to invest your money among investments that have soared. But it’s not generally the smartest way to go about it.
For example, many investments that have soared recently have actually soared right past their intrinsic value and are now overvalued. Even if they’re trading at a fair value, why would you choose them over alternative solid investments that seem undervalued? The undervalued securities, after all, are the ones you can most reasonably hope to appreciate in the near term.
