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Some Advice from "Silent Cal" By Stephen J. Butler

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President Calvin Coolidge once said, "The business of America is business." To paraphrase, I would say, "The business of money management is marketing." I was struck by the story last week about the extent to which the major financial institutions are firing many of their highly paid economic strategists. In the light of these turbulent and depressed markets, one would think that we need these people more than ever right now if they were once so smart as to be commanding from $5 million to $20 million per year. Instead, last Sunday's New York Times said, "?investment banks?have been questioning whether the position as it exists is relevant in today's complex market environment." I guess we only needed them when the market environment was simple.

What we now realize is that these self-styled experts may never have contributed in any meaningful way to the actual results generated by fund managers or their investment institutions. Those global strategists were only there for marketing purposes. They provided "talking heads" for television and served as the spokesmen for their organizations. Why am I suddenly reminded of "Ted," the news anchorman on the old Mary Tyler Moore show?

Years ago, I remember talking with a money manager who had left a larger firm to start his own company. He bluntly stated that, in his experience, successful money management had little to do with picking stocks and was mostly an exercise in marketing. If the so-called "efficient markets" theory says that all information is known and reflected in the price of the stock moment by moment, then this would explain why 70% of a stock's performance is a function of what the entire market is doing over any long period of time. There are very few people who consistently have an "information-edge" year after year unless they are breaking the law.

There are, of course, a few money mangers that have somehow defied the odds and have beaten the stock market averages over long periods of time. Clipper Fund and Dodge and Cox Stock come to mind as well as the Sequoia Fund, which has long since been closed to new investors (and which invested primarily in Berkshire Hathaway stock.) However, John Bogle, the Vanguard founder, makes the point in his books that it is impossible to predict, prospectively, who these future, winning managers will be.

When it comes to marketing, it can pay to be big. The mutual fund industry is still one of the world's most profitable industries because most of us shoppers are not price conscious. We will pay anything for what we hope will be the best results. Now, we're all totally traumatized as we look for the fund that has "lost the least." Or worse, we start wishing we were in one of these oddball fund types like precious metals that may have made a little money recently. Big fund companies and brokerage firms still have plenty of resources they can squander on advertising, so their marketing efforts are finding an easy target as they prey on our feelings of loss and insecurity.

Successful marketing on a smaller scale, was accomplished by Nicholas Gerber who created an extremely fast-growing mutual fund working out of his home in Moraga, California. The Ameristock fund has topped the performance charts for several years. Its success was based upon one of the simplest concepts imaginable. He offered money management for free for the first few years. Having no annual expense ratio on a fund that was largely an S&P 500 clone gave him an edge that placed him high in the performance charts. Step two was to sign on with Charles Schwab's Mutual Fund marketplace where his fund could be accessed and recommended by over 4,000 financial planners. Since 1966, Ameristock has attracted $1.5 billion dollars, and the company still makes a point of cutting expenses close to the bone. To their credit, Nick, Andrew Ngim, and a small staff have delivered some excellent investment performance representing a successful follow-up to their creative beginnings. It all began, however, with a successful marketing strategy.

While marketing may be the cornerstone of successful money management, investors need to focus on results. It's like the old axiom, "We're not buying the drills. We're buying the holes that the drills will make." What we really want when we spend money for investment assistance is the objective advice we know we need. Money managers and fee-based financial planners probably offer the best value for that 0.5% to 1% of assets that most professionals charge. This represents a better value than paying the same extra 1% to a large mutual fund. Why? Because what most people need is someone who will do some handholding and stand in the way of a bad investment decision.

A fee-only planner who encourages a client to use a collection of inexpensive mutual funds (with expense ratios of 0.5% or less) is right here in the trenches where they can integrate investment decisions with meaningful tax planning. Now we're beginning to see some value from our investment advisory dollars. By comparison, a collection of expensive mutual funds influenced by the remaining "global strategists" who haven't been fired yet represents far less value and virtually no handholding.

If the business of money management is marketing, we need to be aware of that fact and consider other alternatives for our advisory dollars. There's always room for a "do-it-yourself" approach that, when compared with the experts' results, is probably not looking so bad. We definitely don't need those global strategists who could be following "Silent" Calvin Coolidge's other example when he said, "I do not choose to run in 1929."

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