Whole New Ball Game
February 2003
by Michael Walls

Remember the old days – when you'd get a quarterly or annual report from your favorite mutual fund or individual security? Some of them would read like a colorful, high gloss brochure for an amusement park. Nothing but exciting fun and games. Hours and hours of entertaining trills and jollies. Once you step inside, the excitement never ends. Risks? Oh, sure, there's risks. But, heck – you take risks just getting up in the morning. You take your life in your hands just getting to work everyday. We have risks here too – but if you know how to watch for them, keep your hands and feet inside the vehicle at all times, stay away from the chili dogs and curly fries – well, then you should be all right.

Fast forward three years – the brochure for that amusement park now reads like your accountant's itemized tax return. This ride is closed for repairs. That feature isn't playing anymore. The colorful charts that looked like the stairway to heaven have been replaced by spreadsheets of black and white numbers.

We're in a whole new ball game when it comes to investing. All of the rules have changed – and we may never play the same way again.

It's the start of a new year. Like most people, I'm beginning to receive all of my 2002 tax statements from all of the institutions I borrow money from or invest money with. The people I borrow from have me over a barrel. There's no reason to try and impress me. They just send me the bare minimum in the form of paperwork. "Here – you paid $15K in interest this year. Tell your accountant."

The people I invest money with, on the other hand, have some explaining to do. And they need to do it in such a way as to make the bad news sound not so bad. "The glass is a quarter full!"

We're in volatile times – I understand that. Social unrest in the Middle East, worldwide economic uncertainty, post 9/11 war against terrorism, corporate mismanagement, and the worst economic slump since the '73-'74 bear market. But fund managers can't take all the credit during the good times, then blame outside forces during the bad times. They need to accept part of the blame – and they need to convince me they have a solution.

As I collect annual reports from the various funds and individual securities I own, I need to decide which investments I'm going to stick with and which I'm going to dump. My decision will probably be based on how each of my funds explains their performance over the past year, and what their plans are for the future.

I notice a wide variety of formats and techniques in reporting. Some have spent the money on the high gloss brochures again, perhaps putting on a show of confidence that "these markets haven't affected our commitment to spend money." Others look to be printed on recycled paper and appear to be satisfying the SEC with the bare minimum requirement for annual reporting.

One of my mutual funds is called the Wireless Fund, an independent fund managed by Value Trend Capital. I bought this fund about three years ago, during the "wireless" feeding frenzy. At the time their philosophy made sense – "The World is Going Wireless." It still makes sense. But wireless companies are in the toilet, along with my Wireless Fund – down 88% since I bought it.

What do I do? Do I sell the remainder of my holdings? "Wireless" is still a good idea. But there's more to investing then "good ideas." There's "research" and "management." Two things I'm not sure my Wireless Fund managers are excelling at. My Wireless Fund's annual report this year was pretty non-descript. A floppy, black and white, recycled paper, chartless report. They could have just as well have sent me a tiny slip of paper that said, "Here you go. We lost 53% of your money this year. Thought you should know."

One of the individual securities I own, Netopia, sent me their annual report and proxy statement. Netopia makes DSL products. They are also down nearly 95% since I bought them. Their report and proxy statement is a big, thick, thorough review of their financials. And unless your life savings is invested with them, I doubt you'd crack the cover to give it a read.

I thumbed through it. The first thing that I noticed was the front cover. A flashy logo with a tag line saying, "Making broadband work!" But at under $3/share (down from a high of $95/share) how well can broadband be working? A brief paragraph labeled as a "letter to the shareholders" on the front cover mentions the "difficult economic environment" and some general plans for the future. After that you get page after page of financial reports and executive salaries. (Hmmm…I'm out $5K and the CEO takes a $20K bonus.) Somewhere deep in the middle I run across some pretty scary reporting related to "risks." Words like "negative cash flow" and "poor performance" paint a more realistic picture than anything a CEO can try and sell me.

I also own some Janus Funds. And although Janus is a large, well-known and established fund manager, they have not been immune to the "difficult economic environment" either. Most of the Janus domestic equity funds are down around 25% for 2002. Not bad compared to specialty funds or select securities. But I'm investing to make money, not to say "Hey, down 25% – not bad!"

Janus sent out their annual report as well – a modest and tasteful, ten-page review of the 2002 results, including a one-on-one interview with the new CEO and a feature article. It's a well written piece called "Then & Now," comparing the bear market of '73-'74 with the current bear market, that tries to convince me that the markets are poised for a tremendous rebound.

I do appreciate Janus' approach to their customers' concerns. They have taken the high road in admitting they must improve performance, rather then flatly blame "economic conditions." They've pointed out misjudgments on their part (stating that they miscalculated with Gap, Inc., and have liquidated their firm-wide position), and describe their strategies going forward (including the launch of a new lower risk fund).

I believe a rebound is inevitable. The question is when? Janus would have me believe it is right around the corner. (Although, I think that's what they said last year.) No one knows for sure – but I'm fairly certain it will be a gradual and long recovery.

Right now I need to position myself with the best fund managers – managers who do the research, crunch the numbers, actively manage – and who know how to react during critical times. These aren't the times to invest in trends and hype and "good ideas." Those days are over.

I had a boss who once told me, "Every fund manager looks like a genius during a bull market. The true genius is the manager who can lose the least during a bear market."

(Michael Walls is a volunteer staff writer for 2 Walls Webzine and is a recreational investor. By no means should anything he says be taken to the bank and cashed in for gospel truth. Read at your own risk.)