By Jason Zweig | Mar 10, 2017 10:44 am ET
Image credit: Caravaggio, “The Incredulity of St. Thomas” (ca. 1601), Sanssouci Picture Gallery, Wikimedia Commons
My “Intelligent Investor” column this weekend looks at new approaches to financial disclosure. Rather than the deadly dull, seemingly endless streams of verbiage that fill today’s prospectuses and proxies and annual or quarterly reports, disclosures could be interactive and educational.
The extensive new research in the field reminded me to dig up what may be the best risk disclosure I’ve ever seen.
Over three decades of covering the investment industry, I’ve been struck again and again by how little variation there is in financial documents. The names and numbers change, of course, but the wording is boilerplate that almost never differs from year to year or firm to firm.
The IPS Millennium Fund was an exception to that rule. This little mutual fund, run out of Knoxville, Tenn., spoke to its investors with brutal honesty.
I never met IPS’s founder and portfolio manager, Robert Loest, who died in 2010, but we chatted a bit by email and phone back in 1999 and 2000.
Mr. Loest, a chartered financial analyst who also had a Ph.D. in biology, seems to have had a low tolerance for stupidity and a pathological aversion to pussyfooting around the truth.
I was delighted to find this week that the Internet Archive’s Wayback Machine preserves Mr. Loest’s “Plain Language Risk Disclosure” from early 1999 in all its glory.
Before you read it, bear in mind that this was near the peak of the Internet bubble, when crazed speculators were tripping over themselves to buy stocks for hundreds of times their projected profits in the year 2525.
Mr. Loest struck a drastically different tone, and it’s worth quoting what he wrote in full (spelling and punctuation uncorrected from the original):
Plain Language Risk Disclosure
First of all, stock prices are volatile. Well, duh. If you buy shares in a stock mutual fund, any stock mutual fund, your investment value will change every day. In a recession it will go down, day after day, week after week, month after month, until you are ready to tear your hair out, unless you’ve already gone bald from worry. It will insist on this even if Ghandi, Jefferson, John Lennon, Jesus and the Apostles, Einstein, Merlin and Golda Maier all manage the thing. Stock markets show remarkably little respect for people or their reputations. Furthermore, if the fund has really been successful, you might be buying someone else’s whopping gains when you invest, on which you may have to pay taxes for returns you didn’t earn. Just try and find somewhere you don’t, though. Dismal.
While the long-term bias in stock prices is upward, stocks enter a bear market with amazing regularity, about every 3 – 4 years. It goes with the territory. Expect it. Live with it. If you can’t do that, go bury your money in a jar or put it in the bank and don’t bother us about why your investment goes south sometimes or why water runs downhill. It’s physics, man.
Aside from the mandatory boilerplate terrorizing above, there are risks that are specific to the IPS Millennium Fund you should understand better. Since most people don’t read the Prospectus (this isn’t aimed at you, of course, just all those other investors), we thought we’d try a more innovative way to scare you.
We buy scary stuff. You know, Internet stocks, small companies. These things go up and down like Pogo Sticks on steroids. We aren’t a sector tech fund, we are a growth & income fund, but right now the Internet is where we think most of the value is. While we try to moderate the consequent volatility by buying electric utility companies, Real Estate Investment Trusts, banks and other widows-and-orphans stuff with big dividend yields, it doesn’t always work. Even if we buy a lot of them. Sometimes we get killed anyway when Internet and other tech stocks take a particularly big hit. The “we” is actually a euphimism for you, got it?
We also get killed if interest rates go up, because that affects high dividend companies badly. Since rising interest rates affect everything badly, we could get killed even worse if the Fed raises rates, or the economy in general experiences higher interest rates beyond the control of those in control, or gets out of control. Whatever.
Many of the companies we buy are growing really fast. Like, 50% – 100% per year sales growth. Many of them also don’t make any money, although they may be relatively large companies. That means they have silly valuations by traditional valuation techniques. We don’t know what that means any more than you do, because we have never seen anything like the Internet before. So we might overpay for these companies, thinking we are really smart and can get away with it because they are growing so fast. It doesn’t take a whole lot for these companies to drop 50% or more, because nobody else knows what they are worth either. Received Wisdom can turn on a dime in this business, and when that happens prices fall off a cliff.
Even if we were really smart and stole these companies, if their prices run way up we are still as vulnerable as if we were really dumb and paid that high a price for them to start with. If we sell them, you will get pretty irritated with us come tax time, so we try not to do any more of that than we have to. The pole of that strategy, though, is that if we are really successful, you will have a lot of downside risk in a recession or a bear market. Bummer.
Finally, if you haven’t already grabbed the phone and started yelling at your broker to sell our fund as fast as possible, you should understand the shifting sands of technology. It doesn’t take billions of dollars to start a high tech company, like it did U.S. Steel or Ford Motor. Anybody can do it, and everybody does. Many of our companies are small, even though they dominate their market niche. It’s much easier for a new technology to blow one of our companies out of the water than it was in the old days of canal, mining, railroad and steel companies.
Just so you know. Don’t come crying to us if we lose all your money, and you wind up a Dumpster Dude or a Basket Lady rooting for aluminum cans in your old age.
In case you hadn’t gotten the point yet, Mr. Loest concluded with this note in bold-face italics:
Please e-mail us if we haven’t scared you enough, and we’ll try something else.
Mr. Loest’s fund never gathered much more than about $200 million and lost most of its assets in the bursting of the tech bubble. The Integrity Viking family of mutual funds absorbed IPS Millennium and a sister portfolio in 2004.
So candor might not pay. But it certainly is refreshing, and investors could use a lot more of it.
Source: WSJ.com, MoneyBeat blog, http://on.wsj.com/2mJiGHu
Resources:
Definitions of ANNUAL REPORT, DISCLOSURE and PROSPECTUS in The Devil’s Financial Dictionary