Forum Archive Index - February 2000

["Brian Brakenridge" <brianbrak@xtra.co.nz>]

Hi Snoopy: Sorry I've taken a while to respond. Your comments are valid,
however:

<So why not invest in the 15% that outperform the index?>

Unfortunately those that make up the 15% are seldom the same every year.
I've been hunting for an article I read, I think on the Morningstar (US)
site, which analyses previous and subsequent performance of individual funds
who outperform the index on a specific year. Very few of them consistantly
out perform year in year out. The trick is picking those that do and when
you find one there is no telling that the manager who has been helping his
fund outperform for the last 5 years isn't going to be headhunted by some
other fund.

<If they didn't have entry and exit fees they may be hijacked by day
traders, which would reduce their appeal to the long term investor.>

Sorry, I'm no expert, but how can a day trader affect the price of an index
whose price is governed by the weighting of the stocks which make up the
index rather than the demand for the index itself? Can you give me an
example of how a day trader had "hijacked" an index fund, especially during
the heady days of the last 12 months.

<I 'have heard' that the S&P 500 index funds hold 500 stocks.   It's
of the same order.>

Problem is the turnover of the 500 stocks in the S&P is, I understand, about
4%, where the average actively managed equity growth fund is closer to 60%
and higher, bought about by managers constantly trying to chase the average.

<Brierley in GPG has had the same thoughts and has been sitting on a
mountain of cash for a while now.    As a consequence teh GPG share
price has gone nowhere of late.  How much cash (in percentage of your
total assets terms) do you think it is prudent to sit on?>

Yep, and I understand Buffett has a war chest of US$33b. Snoopy, who knows
if this is the right strategy. Plenty of people around are shooting down
Buffett, almost in a sigh of relief that the man isn't infallible, but you
can only look at his (and Ron Brierley's) success long term and make your
own conclusion. We all know that the market will correct, one day. It's a
matter of keeping everything in balance.

I like to sit on about 10% cash. Sure there is an opportunity cost of not
having that money in the market but it means I have a bit up my sleeve for
an emergency and gives me the flexibility to move if things do drop. A
contrarian investor might tell you that the stronger the market grows the
more cash you should have in reserve.

It's an interesting debate and one which has been going for some time and
will be for a long time to come.

Cheers, Brian




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