Dear Dagen: What That Letter to Shareholders Is Really Saying

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Every quarter, mutual fund companies send out scores of letters explaining their funds' performance during the past three months.

When times are good, you can usually figure out what the fund managers are trying to say.

When they're not, the managers often make transparent attempts to convince shareholders that bad performance is somehow acceptable. It's as if enough buzzwords and euphemisms will make you forget a pathetic return.

The following is my own fictional version of a jargon-filled shareholder letter accompanied by plain-English translations.

Dear Shareholder:

The first quarter of 1999 again offered compelling challenges to our investment approach. An irrational investor mindset still reigned supreme, and the market continued to ignore many of our stocks.

Translation: Sorry. This is the eighth quarter in a row that the fund has dramatically trailed the S&P 500 and its peer group. Since we need someone to blame for the fund's chronically dismal performance, we'll accuse some faceless, "irrational" investor. It's certainly not our fault that this fund acts like it's addicted to Quaaludes.

During the first quarter, the fund declined 3% while the S&P 500, an unmanaged indicator of the stock market, gained 5%.

Translation: If we can't beat the S&P, we at least can call it names.

However, the fund's five-year average annual return of 27.8%, as of March 31, 1999, beats the S&P 500's return of 26.3%.

Translation: Most of that index-beating return was earned in the first six months of the fund's life, when it got into some scorching initial public offerings. Also, our return isn't adjusted to include the fat load that investors have to pay to buy this fund.

During the quarter, our portfolio's performance was impacted both favorably and negatively by many of our favorite stocks.

Translation: Stocks went up. Stocks went down.

We remain confident in the long-term growth prospects of footwear manufacturer Profit-Less Industries, the portfolio's largest holding, despite the accounting irregularities that surfaced in February.

Translation: Following an inquiry by the Securities and Exchange Commission, the company's chief financial officer left the country on a one-way ticket to parts unknown. We've been assured by the company that it will spare no expense in locating this fugitive and recovering the misplaced millions.

We maintain our positive outlook for Bottomless Pit Corp., a leading biotechnology concern. The company assures us that its application to the Food and Drug Administration for its drug 14U14ME, which we mentioned in our third-quarter letter in 1995, is now on the fast track for approval.

Translation: We have no idea what's really happening with this drug. But we can't sell the stock because there are no buyers. Hey, at least the company isn't killing anybody.

In addition, we believe the company's existing products can still achieve greater market penetration than the current sales figures suggest.

Translation: Perhaps the company can dump some of its excess inventory on China because the domestic market sure won't buy it.

There were several other stocks that disappointed our rational expectations. However, as long-term investors, we know that our patience will pay off.

Translation: We know that bankruptcies and product recalls are always disappointing, having experienced many in the past. We would appreciate any prayers or positive rumors posted on message boards.

In fact, we believe that our poor-performing investments offer excellent buying opportunities. As assets flowed into the fund during the quarter, we added to many of our positions when those stocks trended downward.

Translation: As some of our stocks fell, we were buying. We can't just sit here and watch them fall. We have to do some work to justify that 1.75% expense ratio somehow. Despite our performance, people keep putting money into the fund. Our new TV ad campaign, featuring a Sinatra/Elvis/Streisand montage, certainly helped attract new investors.

The market continues to focus on a small number of companies and ignore a broad range of others. However, we remain dedicated to our proven investment approach and exercise patience when investing for the long term.

Translation: We've sat on some of these losing stocks for years.

We believe in buying well-managed businesses that are run by seasoned, shareholder-friendly professionals.

Translation: We acknowledge that some of these professionals are so seasoned that they seem to be unaware of a few new developments in business, like the Internet and globalization. But we swear they're learning.

Getting to know a company's management is of the utmost importance to our investment method.

Translation: We meet each company's management team just once, but we make sure every executive has a firm handshake.

We focus on the fundamentals of each company, but also invest based on broad macroeconomic trends. We want a company's earnings to be growing faster than the overall market, but its stock has to be trading at a discount.

Translation: We're investing your money any which way we can.

We believe this exceptionally unusual market will not be able to continue at these unsustainable levels. Our highly disciplined investment approach should be able to capitalize on a future market shift.

Translation: Every dog has its day.

Sincerely,

Your managers

Have you received any jargon-filled shareholder letters lately? Email me at [e-mail] with your own comments.