The Deceptive Wizardry of Fund Managers

September 26, 2006 –

merlin2.gifAs I looked at some of the daily trading volumes of some U.S. stocks this past week that have hit 52-week highs, I noticed an unusually large daily buying volume this week, some with volumes so exaggerrated that it is safe to assume that institutional buying is responsible for the lion’s share of these unusually high buying volume days. I thought, “Why in the world would people be dumping tons of money into these stocks at their 52-week highs? That’s just moronic.” And then I remembered why.

volume.jpg In order to support my point, I compiled the table above. All of these stocks have hit 52-week highs within the past week and look at the percentages over the 3mo average daily trading volume for the highest volume days for the past week: McDonalds (160%), Priceline (160%), Harley Davidson (57%), Verizon (136%, Unilever (39%). All of these spikes in daily trading volume were almost surely attributable to fund managers scrambling to add these positions to their portfolios before quarter end this week as they dumped their worst performers. This is a practice that happens close to every quarter end. Why do they do this? So when they report their portfolio positions to their shareholders, they can exclaim, “Look how smart I am! I own almost all the best performing stocks over the past quarter.”

Not only is the practice ridiculous and deceptive, it’s just plain moronic. Buying stocks at the peak of their annual highs just to try to fool shareholders is about the best possible thing fund managers can due to destroy shareholder value. Yet every quarter, they line up and do it. In fact instead of buying these shares as fund managers have done, if I’ve owned these stocks for enough time to be sitting on nice profits, I would be selling substantial positions to protect profits. That’s why, as I’ve been saying all along, when it comes to investing, your best off taking the DIY approach. Do It Yourself. But then again, since I think U.S. markets will be junk in the future, I should start talking about other markets. So coming up, I’ll be discussing Japan.

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