Wednesday, April 11, 2007

Investing: John Bogle's Book & Oppenheimer's Fund Activism

Today's Wall Street Journal carried two interesting pieces on investing.

The first one that caught my eye was a review of John Bogle's The Little Book of Common Sense Investing, by Burton Malkiel. Apparently, there is a series of Little Books, and Bogle's is but one. Malkiel, a financial maven of no small repute, recommends Bogle's volume over those of Joel Greenblatt and Christopher Browne. The former has received good reviews, so it's no minor thing that Malkiel makes this recommendation.

Perhaps the most revealing part of the book, to judge by Malkiel's review, is Bogle's no-nonsense chapter entitled "The Grand Illusion." In it, Bogle provides an analysis of why the average investor earns so much less than the market rate of return. Parenthetically, last week on CNBC, Schwab Chief Market Strategist Liz Sonders noted, based upon Schwab research, that frequently-trading investors earned, on average, as little as 4-6% per annum, versus the S&P index's long-run 10-11% per annum average. That's a stunning differential.

In effect, Bogle, at a stroke, explains why the 'average' investor has no business owning almost any equities directly. For so many reasons involving management and timing, well beyond simply selection issues, s/he typically underperforms the market. Of course, from Bogle's perspective, being the inventor of the passive (sector) index fund concept, this is heartbreaking.

Further on, Malkiel chides Bogle for resisting ETFs. But it's my sense that, whereas Malkiel gives the instrument a pass on tax efficiency bases, Bogle objects to them simply on principle. Anything that facilitates more frequent trading and, thus, opportunities to mis-micro-manage their investments, is a bad thing, in his opinion, for the average retail investor.


The other piece of interest to me is the article on Oppenheimer's mutual fund's involvement in the management shake-up at Take-Two Interactive Software. As I wrote here recently, and here, over a year ago, I see essentially two polar positions.

The first is that of minority shareholders who are simply price- and management-takers. I'm one of those. I buy shares of companies for their existing performance prospects. If those change, I sell. I don't really care to have any truck with affecting their operations.

The second is that of shareholders who, even if technically a minority, hold, like Oppenheimer's fund does, a very large chunk of some company. In Take-Two's case, it's up to 25! I would hazard to guess that, combined with the hedge funds, with whom they are collaborating, Oppenheimer's shares are part of a majority of shareholders.

Thus, I say, bully for Oppenheimer & friends! Really. If you're going to own a quarter or more of a company, you are responsible for oversight. You'd better have a board seat. You are, in effect, a shadow management. I think this is one instance in which mutual fund activism is warranted. Once you get past the dubious wisdom of a publicly-traded fund owning 25% of a smallish, illiquid company.

1 comment:

Vaishali said...

I have been reading up on this subject as well.

I think it';s heartening to see that some of the investors are taking interest in their companies. Maybe it's a sign of things to come.
http://vaishalisblog.blogspot.com/2007/05/business-and-new-civil-society.html