| |  | | Lynn Carpenter | Dear Friend,  We’re going visual today. There’s going to be more help on this subject … it’s coming Thursday. But I want to thank Hari for asking the right question.
While we all (even in India) are waiting for the markets to bounce back, nobody knows exactly when. I am also learning a lot. But as someone put it aptly … bulls or the bears lead the way and the sheep (retail investors) follow. But it is the “intelligent” investor who makes money. But this is only when he gets the right information and he uses the same effectively. So it's mail like yours that helps. But I would suggest that you give us some basic lessons - and teach us more on the little tricks - the cues we should look for. Good request, Hari. To answer it, I am going to rework my “Chart Reading 101” chat that I have given at conferences into my Investor’s Daily Edge piece for Thursday, when I have the whole space to spread out in (as well as time to find my notes.) So, don’t miss that one. We’ll walk through some charts together with a simple tool anyone can master. There’s another point in Hari’s letter that is worth our attention today, though. And I have this to say to you, so listen up. Stop being humble. No more apologies. Investors of the world unite! We “retail” investors are not the sheep in the market. If anything, we’re the opposite - each of us working alone, finding our own way. Sheep? That’s the pros. Do you have any idea how little fresh thinking goes into most mutual funds? We hear about the greats, but the truth is that with thousands of funds out there, run by committees of no-name junior analysts, there’s a whole lot of plain old copying going on. Not to mention fading the S&P or the Dow on the sly to be sure fund results get close to index results. In the competitive world of hungry young fund managers hoping to climb the ladder, being different and right might pay off. But the risk of being different and wrong is too great to try it. On Wall Street, it’s OK to be wrong if and only if everyone else made the same mistake. Sheep rule Wall Street’s back offices. Boy, that was a flashback to grad school. We linguists abbreviated “if and only if” as “iff” in our grammar propositions. Anyway, back to Wall Street. The pros aren’t very imaginative or brave, and they aren’t very steady, either. In 2005, the Investment Company Institute (ICI) calculated that the average turnover rate for the stocks held in mutual funds was around 110 percent. I don’t know any normal investors who are that fickle with their core investment portfolio or retirement accounts. That’s for traders and speculators. The “median” turnover for mutual funds in 2005 was about 60 percent. So half the funds came in above 60-percent turnover. That’s the equivalent of buying 20 stocks this year and selling 12, buying 12 more to replace them, and letting only eight stocks ride. Notice how the midpoint looks more respectable than the simple average? Wait, it gets better. Suddenly, in ICI’s 2007 report, the turnover is better yet. That is, lower. Do you think fund managers suddenly got smarter last year? Not a chance. Now ICI omits its simple average and median turnover rates and only reports “asset-weighted turnover,” and it’s a beaut. They were playing with that back in 2005, and it worked out so well, they’ve decided to run with it. This asset-weighted method multiplies turnover rates by the size of the funds before averaging. So the actions of the biggest funds more than offset others. Have you figured out the big lie implicit in this trick? The biggest mutual funds are S&P 500 index funds, which have practically no turnover. Give them more weight, and suddenly the whole industry looks angelic. Never apologize for being “just” an individual investor, a retail investor, or a “little guy.” And don’t think you belong to the company of sheep and that all the bold thinkers hang their coats up on Wall Street. My experience with newsletter readers is that they are often very good, and those that aren’t yet are working hard on it. If they follow anyone, it is only in the nature of a seeker looking for some leadership and insight. I don’t detect much sheepishness in the newsletter crowd. Now, about those funny pictures and the headline question that I left hanging. It’s a partial answer to why investing hurts so much. In the first picture, did you see men on white horses moving left? Or did you see men on black horses heading to the right? And in the second picture, did you see a duck or a rabbit? We don’t always see everything that’s in a picture right away. And one thing investors do not tend to see realistically is price charts. What’s more, because we are not safe in groups, spending other people’s money, our perceptions are the source of considerable pain at times. Most of us - me included - look at price charts and get excited about the possibilities they show. Good stocks, as well as the whole market, strongly trend upward over time. That’s reason to participate. But like not seeing the black horses among the white ones, or not seeing the duck behind the rabbit, we don’t really fasten our attention on the dips in those charts. Then when we buy a stock, we get to feel them. They were always there in potential, but that’s not our expectation. This is betrayal, and betrayal hurts. 
So on Thursday, there’ll be a little help on using charts and putting some balm on the pain of expectation disappointed. Until then, Lynn P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com. INTERNAL ENDORSEMENT Winners Cherry Pick!
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