Mutual Fund Hara-Kiri

A year ago, in a fit of personal mad-ness, I took a gamble. I gave $2,500 to 50 mutual funds to monitor their performance over one year’s time. People had been criticizing me for obsessing about short-term performance, so I made a vow: I would not look at the funds or the statement for one year. I would keep myself in the dark and depend on the fund managers to steer me through a tough market. I would become the ultimate mutual-fund buyer, the uncritical, non-switching long-term investor, which everyone in this mutual-fund industry says is the best way to make good and measure performance. I would take this blind chance with these 50 managers, all of whom had good records during the late-nineties bull market, even though I have always been convinced that managers should deliver good performance all of the time, not just over the long term, because “long term” might just turn out to be a time period that exceeds my, well, uh, life. I thought they would have been more cautious.

The results are in, and I am staggered by the losses. I didn’t give my money to managers; I gave it to magicians who made my money disappear. My $125,000 has been reduced to $84,000. Forty-seven of the managers lost money, only three made money, and of those, only one made me enough money to offset the fees I paid to open the accounts and keep them running: Oakmark Select Fund.

Some of the managers’ performances were so shameful that I can’t believe these folks are still running money. Take Malcolm Fobes of the Berkshire Fund. This fellow had a real hot hand, and with a name like Malcolm Fobes (no r) and a fund that just happens to share a name with investor god Warren Buffett, how could I lose? It turns out, of course, that David Copperfield has nothing on Mr. Fobes. Berkshire Fund poleaxed my hard-earned dollars; it took $2,500 to $555, mostly through incredibly poorly timed buys of technology stocks. Malcolm’s claim to fame was that he was in the heart of Silicon Valley and would see any decline coming well ahead of others. Whoops! He stepped right into it. It would be harder to lose more money on tech if you were trying to.

Another spectacular loser was the Amerindo Internet B2B Fund, set up to capitalize on the red-hot companies building out the Internet. Only $586 remains of the $2,500 that I sent to that manager. Somehow, I don’t think if I wait another year, Internet business-to-business stocks are going to come roaring back.

I am not picking on just these two funds. Twenty-five of the 50 funds lost more than $1,000 of the $2,500 I gave them. That’s nothing short of unbelievable, especially when you consider that they received the money long after the nasdaq had peaked. And it wasn’t like I avoided any due diligence. I insisted that all of the funds have solid records from Morningstar, a rating system that I now realize may work only in bull markets and hasn’t been tested during a tough period. Furthermore, all of the managers were part of the supermarket of mutual funds that Schwab offers, so they had to have been vetted by someone at that great firm, too. In a down market, you try to lose less, not more. Someone tell these guys! What happened here? Quite simply, I think many of these managers were in over their heads. They got into it during the heyday and had no idea of the high-risk nature of the games they were playing, chiefly in technology stocks. (The lone big winner, of course, Oakmark Select, was a value play, not a growth stock fund.)

A whole industry got used to having stellar performance and allowed managers to make bets that were way too dangerous. Of course, the managers’ quarterly statements, which I dutifully read through, are all very reassuring; they make you think that everything will come back, like you’re a kid who’s been left at the mall and these are your parents. The line from the children’s song – “They always come back and get me” – played in my head each time I looked at their mailed missives.

Perhaps more shockingly, this colossal collapse has gone unchronicled by virtually every major newspaper, magazine, and television program, in part because there are unwritten rules against criticizing managers in this powerful industry. First, they are needed as sources and as guests for programming purposes. A couple of weeks ago, as I was scrutinizing this list, I looked up on the tube at the young cherub praising this networker and that semiconductor company, and I thought, Wow, that fellow sure sounds like he has a hot hand. Until I saw the Chyron underneath, john leo, northern trust, and looked him up on my list. The man had just cost me $1,500! He ought to spend less time preening in front of the camera and more time picking stocks.

And I quickly found out what happens if the press violates the unwritten agreement. I set out to write about these 50 funds as part of what I had hoped was to be a sponsored tote board on the Web, but no one would sponsor it because I refused to take a pledge that I would not write critically of the funds that cost me a lot of money. And after my Website wrote a couple of tough articles about the Janus family, the fund group pulled all of its ads from, a decision that had a materially adverse impact on my company’s finances. The lesson: Give us a free pass or else – even if we did cost the American people a fortune.

Sorry, no can do. Too much pain. I can’t help squawking, if only just to tell others to be careful out there, as many of these managers don’t have a clue about what they are doing.

As for my money, as far as I am concerned, the experiment is over. I am taking the tax loss and moving on. You can’t pay me enough to lose money any longer this way – and I’ve been doing it for free.
Visit this Thursday at 5 p.m. for “Martini Chat,” a cyber-bull session on the stock market with Eric Gillin and Chris Edmonds. Available free of charge at

James J. Cramer is co-founder of He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time.


Mutual Fund Hara-Kiri