Your Inner Spock

Why do we continue to make the same classic investing mistakes, generation after generation, throughout the world, in all times and in every culture? It is as if history has no meaning for each new age, yet it is there for all to read. We explore this and more in today's letter.

But first, let me offer a few observations about the current mutual fund scandals. I find it interesting that the funds which are the target of investigations still have 90% of their assets. To illustrate this point, I will first offer an insight about hedge funds. In the hedge fund world in which I mostly reside, if a manager leaves the fund, the tendency is to shoot first (redeem) and ask questions later. If there is a rumor of a problem, head for the exits. It is exactly opposite of stock trading strategy. In the hedge fund world, you sell on the rumor and buy on the news. It doesn't make any difference to the managers of the fund of hedge funds who have about 1/3 or so of all hedge fund assets. "Kill them all and let God sort them out," is the attitude. Since it takes several months (end of the quarter) to actually redeem from these funds, the knee-jerk reaction is to send in your redemption notice and then ask questions later.

That is in contrast to the average mutual fund investor, who seems to tolerate the scandals at their funds.

First, if a senior manager leaves a fund in which I am invested or following, that is a HUGE red flag for me, and should be for you. Ask questions immediately, and if you don't get the answer you like, then exit. The answer better not be, "We will soon find someone to…