*Extra* Standing Up to the Chartist Challenge

Despite slings and arrows, Brenda stands firm and says you shouldn't use charts to analyze mutual funds.
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I've been called a lot of things in my life. No need to go into details here, but let's just say that rooting for the

Red Sox

and buying a

Honda

rather than a

Harley

for a first bike often meant that I was less than popular in certain circles.

Charting Funds: Join the discussion on our

message boards.

But all of that now pales. You see, not only did I take on technical analysis in a recent

column, but -- yikes -- Gary B. Smith, the Chartman! What was I thinking?

Thanks to all of you chart cultists, I know what it means to be called names. Given the fact that I argue for fundamental homework when judging a fund, I am apparently a fundy. Worse than that, a fund fundy, the worst epithet in a chartist's arsenal.

Last week, Gary

took me on, defending the concept of charting mutual funds, and the ball is once again in my court. (Perhaps I should have given up when I got all that angry email, but, glutton for punishment that I am, I think this debate is too important -- even fun -- to ignore.)

Before you start the name-calling again, let me say this: I like Gary B. A lot! He's really smart and really nice. I even laugh at his jokes and stick up for his fashion sense on our TV show.

That said, it's still a bad idea to chart funds. It makes little sense, and I suspect it will make you even less money.

Let me take Gary's defense one point at a time:

"Sure these funds are somewhat fluid, but let's not overestimate the impact of changing positions."

Overestimate? How can you overestimate the fact that when charting a fund, you are charting something that can change from one day to the next. Unlike charting a stock, which is a snapshot of the buying and selling in one thing, you are trying to capture what's going on with dozens, sometimes hundreds, of stocks in a portfolio that is essentially blind to the chartist. A fund manager can change positions at will -- without telling shareholders until long after the fact.

Gary offers the example of Bill Miller, manager of

(LMVTX) - Get Report

Legg Mason Value Trust. Because his turnover rate is about 19%, Gary argues the impact of changing positions is minimal. But the facts show just the opposite. You see, Miller is an exception in the fund world, not the rule.

According to

Morningstar

, the average turnover for a U.S. diversified fund is nearly 90% a year. Think about that -- 90%. If turnover is the annual rate of a fund's buying and selling activity, or how much is "turned over," that means, on average, a manager can change his or her entire portfolio almost completely in just one year.

For a lot of managers, that's a lowball number, too. Many sport turnover rates in the high triple digits. There's

Orbitex Growth

, at nearly 1,000% a year. Or the

Van Wagoner

funds, many of which are around 700%. Shall I go on? What about

(PLCVX)

PBHG Large Cap Value (568%)?

(SGRTX)

Strong Growth 20 (541%)?

(BEOOX)

Berger Growth & Income (417%)?

And turnover at funds is increasing, not decreasing. Research from Morningstar shows that in the past few years, it has risen from an average of 75% a year. And in today's manic market, it's only going to go higher as managers try to pump their short-term numbers.

In answer to my argument that you shouldn't chart funds because it's hard to do, Gary says:

"Yeah OK. So what? Is doing the fundamental work on these funds any easier? I'm betting it isn't because I can chart a fund in 30 seconds, but I know I couldn't do the fundamental work on a fund in 30 seconds!"

No, you couldn't. But when I say charting funds is hard to do well -- I don't mean it's time-consuming. I mean that it's hard to

make money

. Jumping in and out of funds based on suspect charts can be quite expensive given all the fees and loads you have to pay, plus even a relatively "clean" fund chart doesn't send you in the right direction.

Case in point: Gary's chart for Legg Mason Value said unequivocally, "It's on a death spiral." Some spiral -- just up, not down! If, based on the technical analysis, you had jumped out of Legg Mason Value when Gary did the chart, you'd have missed out on a major move to the upside. That fund gained 10% in the two weeks since.

Looking at the fundamentals -- which would have shown you that Miller is an outstanding manager over time in a variety of environments -- might have taken more than 30 seconds. But in my book, that's time well spent when your retirement dollars or your kids' educations are at stake.

Now, Gary chose to ignore a couple of my other arguments: that charting a mutual fund leaves out a critical tool in technical analysis -- volume. You simply can't know how many buyers and sellers are moving any of the stocks in a fund portfolio. So any pattern you see may be very weak.

And what about the fact that greed and fear, the two emotions that Gary says technical analysis can measure, don't really show up that much in a fund chart? A mutual fund's price is very removed from bidding. People just don't bid up or down on the net asset value -- so how does greed or fear enter in?

So, you don't know which stocks are in the portfolio you're charting, or at what level of volume. Investors don't even really buy or sell based on the thing you're charting, the NAV. For my money, that's just not good enough.

Sure, take 30 seconds to do the chart. Look at it. Come to a conclusion. But buy and sell mutual funds based on that information at your own peril.

I'm ready for those emails!

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no 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 or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.