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The Biggest Losers

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altA bunch of things irritate me about the way we’re treated in the emergency department. Near the top is that we’re held accountable for everything but on call docs aren’t. I just hate it when I want to admit a patient but the on call doc doesn’t, so over the years I kept a list of patients I admitted–so called “soft” admissions that the on call doc wanted to send home–and found out what happened to them.

altFor a healthy dose of investing perspective, consider how badly some of the biggest names in finance missed the mark in 2011.

A bunch of things irritate me about the way we’re treated in the emergency department. Near the top is that we’re held accountable for everything but on call docs aren’t. I just hate it when I want to admit a patient but the on call doc doesn’t, so over the years I kept a list of patients I admitted–so called “soft” admissions that the on call doc wanted to send home–and found out what happened to them. That way the next time the same doc gave me the run around, I turned around and said “Remember that guy you didn’t want to admit with chest pain last time…AND WHO RULED IN FOR AN MI a few hours later?”

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Something similar irks me with people who make predictions about investment returns but aren’t held accountable for their actions. So I’ve compiled a list of the worst investment calls of 2011. It’s time to do some QA on financial gurus.

#1: “US stocks will crash if our AAA credit gets downgraded”
The first week of August 2011–when our credit rating lost its coveted AAA rating–was incredibly volatile with US markets up and down 5% or more in a day. By the end of September, US stocks had lost almost 20% since the beginning of 2011. But by the end of 2011, US stocks climbed back to right where they started the year. Granted a zero percent rate of return is nothing to brag about, but it was nowhere near the apocalypse many had predicted.

#2: “US bonds are in a bubble and will pop”
You may have heard of Bill Gross. He’s considered the world’s “bond king.” Bond markets react every time his lips move…until 2011. This guy runs what is considered the best bond mutual fund around–the PIMCO Total Return fund. If you’ve got a 401k, it’s a popular choice for a bond fund in many 401k lineups.

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Early in 2011 Mr. Gross sold all US treasury bonds from the fund, stating that the price of US treasury bonds was too high and is destined to go lower. The fund held over $150 billion in US treasury bonds in mid-2010, a position which was slashed to zero in early 2011. In summer 2011 he told investors at a conference that investors who buy US treasury bonds will “get cooked like frogs in an increasingly hot pot of water.”

Well, you did get cooked like a frog, but only if you followed this guy’s advice. The PIMCO Total Return fund was up +3.9% in 2011 but US treasury bond funds, as represented by the Vanguard Intermediate Term Treasury Fund, were up almost 10%.

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#3: “Financial stocks are undervalued and will rebound nicely”
Many mutual fund managers want you to believe they can make a quick buck in so called “undervalued” stocks. Consider two of the top mutual fund managers in the past decade: Bill Miller of Legg Mason Value Fund and Bruce Berkowitz of Fairholme Fund.

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Bill Miller’s claim to fame is that he’s the only mutual fund manager to beat the S&P 500 Index 15 years in a row from 1991-2005. Since then it’s a different story as his fund has vastly underperformed US stocks. He made big bets on financial institutions in 2008 and again in 2011–wrong bets that cost shareholders in the fund big time.

On the surface despite his current woes, his long term record looks impressive. Consider that since he’s been running the fund since 1990, he’s up about 500%. There’s just one problem–the S&P 500 index is up over 540%. So despite his 15 years of outperformance, you actually would have been better off simply following the index than sticking with this so called genius stock picker.

Or consider Bruce Berkowitz–named as a “Mutual Fund Manager of the Decade”– who loaded up on Bank of America and Citigroup in 2011. Those stocks lost -58% and -44% in 2011, making the fund lose -32% overall in 2011.
The performance of these guys was so bad that they competed for last place among all US mutual funds in 2011. Don’t worry though. Bill Miller will be OK. After all he’s already bought his multimillion dollar yacht, “Utopia.” Problem is it’s not utopia for you if you owned these funds.

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#4: “Picking individual stocks from these experts will beat the market”
Every time there’s market volatility, the investment astrologers come out. 2011 was no exception. Barclays Capital, considered one of the top stock research firms in the world, published their “Global Top Picks for 2011” from their analysts. A giant institution like this, with their research prowess, could surely offer insight about 2011 right? They even predicted the potential gain you would see for each of their stock picks. Here were their ten best ideas for 2011, their predicted return, and what actually happened:

A monkey throwing darts at the newspaper could have gotten better results than this. Their single top pick–AMR Corp which is the parent company of American Airlines–went bankrupt while Barclays stated the company offers the “best cash flow and incremental earnings potential.” Oops.

#5: “Interest rates will go up and so will inflation”
The late George Bernard Shaw, a playwright and founder of the London School of Economics, once said “If all the economists were laid end to end, they’d never reach a conclusion.” That’s how hard it is to predict economic trends. Economists predicted interest rates would rise in 2011. Instead they fell to historic lows. US bond interest rates fell from around 3.4% to around 2.0% by year end. The Mortgage Bankers Association also forecast that 30 year mortgage rates would rise to over 5% by the end of 2011. In fact they fell to record lows near 3.2% and provided a fantastic opportunity for you to refinance your mortgage.

It was the same thing with inflation. For years we’ve been hearing rumors that high government spending would cause high inflation, which is the rise in the price of goods and services. But from 11/2010-11/2011 inflation was about 3.4%, which is not too much higher than the average annual rate over the past 80+ years.
So if you shifted your investment portfolio last year based on predictions of the US collapsing, the bond bubble bursting, interest rates rising, or institutional research, you probably lost. Better luck next time.

Setu Mazumdar, MD practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA www.lotuswealthsolutions.com

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