FSO Editorials: "The Pros and Cons of Using An Investment Manager" by Robert B. Gordon 08/07/2006

The Pros and Cons of Using An Investment Manager
by Robert B. Gordon, Sc. D.
August 9, 2006

THE PROS AND CONS OF USING AN INVESTMENT MANAGER

Several years ago I wrote an essay that is in my FSO archive on the subject of HOW TO CHOOSE AN INVESTMENT MANAGER. Since then, and continuing right up to this date, I have received many hundreds of letters requesting the name and address of the money manager in their geographic area. However, for quite some time, I have refrained from giving this information to any of my readers.

I had decided that it was extremely difficult for an investor of the usual age and background to make an informed decision on the basis of the information usually available in the managers sales literature. Then, as more readers continued to contact me, I reached an even broader decision, namely that, for most readers with less than a million dollars, a college degree and less than 80 years old, it was preferable for me to recommend they consider a “do it yourself” investment program.

Helping me to reach this decision was my contact over the years with investors of both sexes and a wide range in age who were quite obviously making very good progress in building a mutual fund portfolio that met their own degree of conservatism and aggressiveness. This process was greatly assisted by my use of example portfolios and recommendation of new ultra conservative funds like the two Hussman funds and the Permanent Portfolio fund with its great record using six asset classes re-balanced monthly. In various percentages these 3 very great funds, by themselves, or with more volatile funds, could build portfolios to meet a large number of investment objectives. The weekly educational letters of Dr. John Hussman on the web page of his two funds give a wonderful education to both novice and experienced investors. And the brilliant stable record of his funds will provide any new investor with a successful learning experience that would be valuable if he or she ever wishes to use an experienced money manager

PROBLEMS IN FINDING A COMPETENT MONEY MANAGER

Wealthy individuals with experience in the field of business or law usually have access to experienced investment management firms who can provide a credible record of their investment management over a period of considerable years. Large firms like Merrill Lynch have provided this service for many years. But men and women with several hundred thousand dollars of hard earned earnings usually have trouble in finding a suitable individual or small firm.

One of the recurring problems is that the financial markets go thru very large cycles during an average lifetime. At the end of most bull markets, a number of fledgling money managers hang out their shingle and seek money to manage. It is extremely difficult to determine how successful they will be and how long they will be in business.

Although, I started investing seventy five years ago and devoted considerable time and effort to it. I gained most of my skill and knowledge in the past ten years after using the
Elliott Wave Theory as my principle market timing device. I have used this knowledge in
many of my essays to guide my readers.

Since we have just begun a major market downturn, this is probably the worst time in
many years for one of my readers to be seeking an investment manager. This is the time to put to work all my work in recent years in discovering and recommending a small group of extremely well managed funds with proven and predictable records.

ARE MULTIPLE ADVISORS SAFER THAN ONE?

Anything is possible but the investor lacks any influence over the investment results of an advisory service. Just contemplate the results a few years from now. The investor has no control at all over the results except to cancel an inferior advisory service.

In recent years we have found just three fund managers, managing 4 funds, in which we have a high degree of confidence for the difficult bear market years lying ahead.

We spend considerable time listening to market “experts” from many Wall Street firms on CNBC. None of them ever mention the Elliott Wave status which we consider to be an essential market timing tool in this enlightened age.

We would not wish to have any of our readers choose a major investment advisory firm to protect their assets in the bear market we see ahead. If any of our readers feel the need to do so we ask them to build one of our recommended fund portfolios to act as a measuring stick for the advisor. We feel strongly that this is the best way to determine whether their advisory fee is justified.

OUR RECOMMENDED 4 FUNDS FOR THE BEAR MARKET YEARS AHEAD

Many of our newer readers will be surprised that we chose to use just 4 funds for the very long and deep bear market now under way and one that we expect to be much longer than anyone of our Wall Street experts now expect. But Robert Prechter, our Elliott Wave expert, has for years predicted two almost unbelievable outcomes, namely that the current bear market may continue till this century ends and that the Dow Jones Industrial average will drop below 400 from its current level near eleven thousand.

Permanent Portfolio PRPFX 20-30 %
Prudent Bear BEARX 20-30 %
Hussman Growth HSGRX 20-30 %
Hussman Income HSTRX 20-30 %

We have tremendous confidence in the proven performance of our 4 selected funds and believe that, used together in a wide range of percentages, they will perform
admirably for the balance of this bear market. These 4 selected funds, used together in various percentages, have proven they are equal to the big task ahead of protecting your precious assets from the perils of a vicious bear market.

And, best yet, although only one of our chosen funds has the word 'Permanent' in its name, all four have been designed for, and are currently being managed to protect your hard earned money in a difficult market environment. In my 8 decades of investing experience, I have never had as much confidence in recommending funds for a challenging job where success is a must.

All of our selected fund managers appear to have lifetime jobs and their funds are small enough to be able to grow substantially without impairing their performance. At least one of the managers, whose name is on his two funds seems young enough to be in charge for a very long time. Best yet, none of our selected funds appears to be vulnerable to the problem of frequent manager changes. This guarantees a very long time manager and better fund management for many years into the future - a very desirable and uncommon arrangement in the mutual fund industry.

OUR RECOMMENDED LONG TERM PORTFOLIO

We expect that many of our readers over the past five years will not be surprised at our fund selections for the many decades of this expected bear market. But we sincerely hope that our more recent readers will go back in our archive over the past 3 years and become better acquainted with these 4 superbly managed funds. We know no other fund, regardless of how superb their recent performance may have been, that we would add to our chosen list of four funds. And we recommend these four funds today for portfolios ranging from as little as ten thousand dollars to at least ten million dollars or more in assets.

These four funds have shown great performance in the bearish years to date and I have a strong conviction their fine performance will continue in the future. I know this is a strong statement but I believe it to be well justified by their excellent history and their well established great records.

We picked these 4 superbly managed funds because of our knowledge of their very fine record over the last five years of the bear market to date, our respect for their
brilliant managers and the very high probability that all four will perform extremely well and in line with their performance over the bear market to date.

Now, their superb records under brilliant management, give me confidence that their great managers will continue to perform as in the past. But that does not say you should buy them and forget them. Over future up and down markets, It will be necessary for each owner to re-balance the percentages of each fund to maintain the desired percentages. Over the future bear market years, periodic rebalancing will be a source of added profits for serious investors. If not taken when they are available, they will be lost. Read our numerous examples of this in our archive of past essays.

Although we cannot predict the future individual performance of these 4 great funds, we have a high degree of confidence that their collective performance will be very satisfactory and will be further enhanced by profits taken from timely rebalancing.

From owning these funds over the years we know that these funds, stand far above others by the brilliance of their original concept and the very sound principles by which they have been managed since they were founded. In the past, I have always given suggestions for the dollar allocation to each of the funds in the portfolio. But at this critical stage of our stock market, I suggest a different way to proceed, namely to begin with 25% in each fund and to alter it only on the basis of market action. I think this will provide a very interesting picture of the individual fund performances and will be quite educational in the early months. Later, you can shuffle the percentages in the four months as experience dictates. Now, lets discuss the four great funds whose great features have been described in many of our past essays.

LIFETIME PORTFOLIO MANAGEMENT

This is almost surely our final essay since my health is in a serious decline. I enjoy hearing from my readers but cannot answer any detailed questions. I hope you will take an active interest in your portfolio and follow its progress. Please take advantage of any temporary profits that may occur in your portfolio that can be realized only by rebalancing when they are available. Otherwise they will be lost. Please consider this essay as a final gift from me and keep it separate and intact so that it can be a standard of comparison for other portfolios.

PROSPECTUS LINKS TO FUNDS
- Permanent Portfolio PRPFX
- Prudent Bear BEARX
- Hussman Growth HSGRX
- Hussman Income HSTRX

Robert B. Gordon, Sc. D.
Sun City West, Arizona
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