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Money Market Fund(s) Fails

The dominoes are falling fast on Wall Street. It's not just a bunch of hedge funds that lent money to semi-defunct Lehman Brothers - mom and pop mutual funds are owed billions. On Tuesday the first money market mutual fund in over a decade announced it has 'broke the buck'. This collateral damage from Lehman is likely why Uncle Sam is now writing blank checks to AIG.

You may want to refill your Ambien prescription before you read this New York Times article about the mess:

The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.

The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.

This is only the second time in history that a money market fund has 'broken the buck' — that is, reported a share’s value was less than a dollar.

This year alone, big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value...

The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. That delay will not apply to debit card transactions, automated clearinghouse transactions or checks written against the assets of the Primary Fund, provided that the transactions do not exceed $10,000 from single or affiliated investors...

Several industry analysts said on Tuesday, however, that the Reserve Fund’s action came after its Primary Fund was hit by heavy redemption demands that intensified the impact of the Lehman losses."

Of course, the fund company trade association assures us that money market funds are sound...

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Wall Street Worries

09/17/08 - Investing Advice

august 2008 performance review

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August was a good month for U.S. stocks and bonds, a crummy month for …well just about everything else around the world. So far, September is not turning out as peachy.

Big Gainers

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While we’re obviously pleased to own some big gainers especially in this hot-then-not market, we always get a little worried when funds in our portfolios start to attract attention – and money. Our idea of asset allocation is to allocate into out-of-favor assets and wait until they are in favor. This applies to stocks, bonds, and cash in general, and specific sectors or fund categories.

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The Seven Percent Dissolution

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Buy High, Sell Low, Repeat Until Nausea Sets In

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Throughout the years we've written many articles and highlighted scholarly research showing how investors often buy high after big runs in a fund (or stock) only to sell after a sharp drop. This pattern is why fund investors tend to underperform the market and is the foundation of our contrarian rating system and methodology that tries to focus attention away from the hot and towards the not.

Statistics aside, a graphical depiction of the "mind of an investor" is making the rounds on the internet. It may not be something you will find in the Wall Street Journal (or impress Edward Tufte...), but it is well worth a peak for a humorous look into the actual thinking that may go on in the head of a performance-chasing investor.

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The Gods Must Be Crazy

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Rough Seas

08/01/08 - Powerfund Portfolios Feature Article

So much for efficient markets, the theory that stocks are always efficiently priced. Such theory doesn’t have much to say for how bank stocks trade these days – up or down over 10% almost every day as speculators simultaneously fear the next IndyMac Bancorp (the aggressive California bank originally named “Countrywide Mortgage Investments” – a name that says it all) but want to get in cheap for the eventual comeback.