Henry McVey is the asset-management and brokerage equity analyst at Morgan Stanley Dean Witter. I don't know him, and I don't think we are related.
He recently penned a piece discussing a panel he moderated at a recent
Investment Company Institute
meeting, and some of his thoughts dovetail into points I sketched in my
last column regarding the Internet and the insurance industry. I think his piece also highlights some of the misunderstandings about what constitutes investing in this day and age. Most of the points are not necessarily McVey's, but his recounting of the panel's opinions. The panel, titled "The Internet and Mutual Funds," also included management from
Scudder Kemper Investments
The panel concluded that the Internet "potentially" favors individual stock ownership over mutual funds. This makes sense conceptually, although for few of the reasons mentioned below. The beauty of the Internet in almost any of its iterations is that it provides nearly boundless information on nearly any topic.
Naturally, those who have correctly bought into the longer-term attractions of equity investing now have access to just about all the information they need to make direct investments in specific stocks -- without having to use a fund and essentially pay someone else to do the work for them. There is nothing inherently wrong with either camp. It is exactly the same decision tree that is employed when deciding whether to go to
or hire a contractor: What skill level is required to do an adequate job? And, most importantly, how do you want to spend your waking hours?
The panel's first proposal was that the "news flow in Internet stocks is much better" than in mutual funds. While most mutual funds disclose information quarterly at best, public companies -- and especially the dot-coms -- can release information almost daily on the Internet. "In the Internet age, these news events draw investors in, creating a far more stimulating experience for Web-enabled investors," McVey writes.
Trust me, this sounds as ridiculous here in its parsed form as it did within the context of the entire article. Let's assume that the reason anyone invests is because they are in it for the money -- and
for myriad psychological reasons (granted, this isn't always true in this day and age). Does anyone care that the means are stimulating if the end isn't profitable?
Clearly one of the silly and harmful byproducts of an extended bull market is that people start doing things for "fun" rather than to make money, and I while I think Stuart on the
commercials is hilarious, there is nothing fun about lighting the candle if you get wind up getting burned. I will also add there is
of value in 90% of corporate press releases -- and that percentage is rising with every Internet IPO. The fewer press releases you receive, the better off you will be.
The panel's next proposition is equally dubious: "Today's investors want to know what is going on with their investment holdings on a real-time basis."
OK, let's exclude those who really are trading for a living; they are still a very small and distinct minority. Is it really helpful to check your stocks hourly in real time, much less daily, weekly, monthly or even quarterly?
Of course not!
In fact, it works against investors to be glued to every tick, thinking it means something.
I admit that I chose not to have a quote machine on my desk for the specific reason that I do not want to be checking stocks minute by minute. I want to be reading, thinking and calling companies. I happen to have a trader who will let me know about the disaster or victory
, but anyone can have
send emails when a stock hits a desired price target. It is silly in my opinion to think that a mutual fund is at a disadvantage vis-a-vis an individual stock because it only prices daily -- and it would not benefit individual investors one iota if funds were priced in real time.
McVey concludes that the mutual fund industry needs to become more open and product-friendly, which is a perfectly sound idea. Nevertheless, I strongly disagree with his proposal to have more online portfolio-manager discussions, "which should draw a broad range of investors, giving them greater understanding and control over the investment process."
There is nothing inherently wrong with a quarterly conference call, Web-based or otherwise, and four more of such calls a year is probably four more than are happening now. Although I personally think that quarterly results are often useless (and I am often at a loss for something new to say to clients when we meet quarterly), it is helpful for the client to further understand what the manager does for a living and how his philosophy is being consistently applied in the portfolio.
But the client should not be in a position to exert "control" over the investment process. The worst thing a manager can do is manage the portfolio to "look good" for his client base, a process which inevitably results in poor decisions made for all the wrong reasons -- and is probably the main reason most managers underperform over time.
As I've noted previously, it's much easier to hit a golf ball on the driving range than to be on the first tee with four complete strangers staring at you. It's no different managing money. I also assume that a client would like a portfolio manager to be spending his time thinking about the portfolio, not responding to hourly emails about his every move.
I also question the push for "greater and more prompt disclosure of both pricing and holdings," even though it may sound good on paper. Even for tot-size, $1 billion managers like us, there are liquidity issues in a number of stocks and I don't want anyone to know what I'm doing until I'm done. People like
and the big hedge funds have to do elaborate dances to establish positions, and it would hurt their investors if that information were disclosed in real time. Even so, I agree with the
recent decision not to let Buffett and other "famed" investors claim exemptions to the standard disclosure rules that apply to everyone.
In conclusion, the decision to buy your own stocks vs. funds has nothing to do with the Internet per se, although the Net's information enables individual investors to pick stocks more successfully. The real difference between stocks and funds remains the same: potential tax consequences, diversification -- and individual investors' decision as to how they want to spend their free time. Stocks that go up are fun, but that shouldn't be why investors pick them.
As originally published, this story contained an error. Please see
Corrections and Clarifications.
Jeffrey Bronchick is chief investment officer of Reed Conner & Birdwell, a Los Angeles-based money management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value fund. At time of publication, neither Bronchick nor RCB held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at