Winning
Funds Share Traits, But the Trick Is Finding Them

By JACLYNE BADAL
December 3, 2007; Page R1

Today’s
article in the Wall Street Journal attempts to help mutual fund investors
determine what characteristics a mutual fund had before it began an 8 year streak of beating the S&P.

“We started by identifying a group of
mutual funds with the longest winning streak against a well-known measure —
eight straight years of beating the Standard & Poor’s 500-stock index. Only
30 U.S.
stock funds made the cut, out of 1,935 eligible funds tracked by Morningstar
Inc. Then we asked Morningstar to crunch the funds’ data from 1998, as the
streaks were set to begin….Along the way, we also noticed …five of the
seven focused on natural resources, such as oil, that were beaten down in 1998
but have boomed since. The lesson? Be willing to invest in categories that have
been out of favor, since they may be due for a resurgence.

Kudos
for the Wall Street Journal for helping investors attempt to find the 1.3% of mutual
funds that had this kind of streak! But come on — what a useless bet to
take. Let’s see, I can:

1.
Try To Beat The Market. ip info . Take my chances that I can identify the 1.3% of
the funds that will beat the S&P . If I do find one of the funds in
the top 1.3%, I’ll beat the S&P by a few points. But if I fail
to identify one of those top 1.3% of the funds, I’ll probably lose 2% a year
for 8 years which will deteriorate my capital by 20% over those 8 years compounded.

2. Buy an index fund or ETF and match the market with 100% probability
without paying much tax.

According
to the article:

“In 1998, the average large-blend fund in Morningstar’s overall
database turned over 62% of its stocks each year. Several of the large-blend funds
on our list came in comfortably under that level. Currently, the average fund
in Morningstar’s large-blend database turns over 72% of its shares annually.
Most of the seven large-blend funds on our list continue to trade less
frequently than their peers.

If
we assume half the normal turnover, the tax bill will eat you alive even if
they do beat the market. Since the study only describes pre-tax returns I’ll bet another 10 – 15 of those funds don’t
beat the S&P.

I think the odds of beating a roulette game by spinning the dice 2000 times
and picking random numbers from the Keno board are better.

To the Wall Street Journal: Great article. Wrong
conclusion. The right conclusion?

Stay away from mutual funds and buy
index funds or ETFs.