10 Questions: Is Your Fund Family the Enemy?

It goes back to Ben Graham's Mr. Market. You've got this manic-depressive guy who constantly offers to buy and sell shares from you at different prices. And if you become manic or depressed, the game's lost.

2. You mention that one of the quickest ways to get to the poorhouse is to make finding the next Microsoft your primary goal. Should individuals invest in individual stocks at all?

I do occasionally buy individual stocks, purely for my own amusement. Ten years ago, it used to be 5% to 10% of my portfolio; it's now closer to a half-percent.

Did you lose money on your stock investments?

Actually, the dirty little secret is I've done very well with individual stocks. However, I now make very small bets with very dry hands. I'm buying things that I find irresistibly cheap. I only buy about one stock a year. I don't put any significant portion of my portfolio in individuals stocks.

The reason you can't make a living buying one or even 10 stocks is because it's unsystematic risk -- risk above the broad market that you aren't compensated for. You can't put a significant portion of your nest egg in such concentrated holdings. Your chance for getting 20 clunkers is actually very good.

That's the problem with trying to find the next Microsoft among the small-growth stocks. You're basically buying a lottery ticket, and it's easy to get 100 losing lottery tickets in a row. That's why small growth is the worst-performing domestic equity asset class -- everybody is looking for the next Microsoft, so the prices of these small-growth stocks get bid up so hideously.

3. Let's talk about mutual funds. In the book, you write that the interest of most mutual fund companies is highly divergent from yours. Would you explain your sentiments to our readers?

The interest of the mutual fund company is to maximize assets so they can maximize the fees they collect. So they will pander to the investing public. If gold stocks are doing well this year, guess what, they'll advertise their gold funds -- no matter how poor the expected returns are.

The classic example is Internet funds three or four years ago. The public wanted an Internet fund. That's the difference between a Scudder or Fidelity, which caters to public appetites, and a Vanguard. Some firms are marketing firms; others are investment firms.