Investor's Corner for December 22, 2003

Investor's Corner Newsletter

By Will W. Woodard, III, CFP®
President, Dare Capital Management & Advisory
December 22, 2003

"Never argue with an ignorant man, because knowledge is limited and ignorance is unlimited; he'll beat you every time."

...Albert Coates, NC Institute of Government, 1945, From Our State North Carolina, October 2003

Well, it's been quite a month: Saddam got caught-hooray! Then, the focus of the entire world turned towards our good old Outer Banks, recognizing the contributions of two Ohio bicycle mechanics who turned a dream of flight into 12 seconds above a sand dune in KDH. Even George W. stopped in to pay a rain-soaked visit.

The equity markets have been mixed but have generally trended upward. Since my last report the Dow and S&P 500 have been outperforming the NASDAQ, which had been the pacesetter during this year's rally. All in all, 2003 has been a very good year for equities.

In this issue of Investor's Corner:

Year End Wrap-up and investment review

"It's the expenses, stupid"; Mutual fund commentary from CBS MarketWatch

Worthwhile links

1. Year End Wrap-up: 2003 was a year of growth and continued evolution for Dare Capital Management & Advisory. Exciting client growth, a rigorous professional designation achieved, and the continued refinement of a client-specific investment management process contributed to a busy and rewarding year. Sincere and heartfelt thanks go out to clients, friends, and associates for your support over the past year. As for 2004, onward and upward!

I have been writing this newsletter (such as it is) since the spring of 2002. Just for fun I thought I'd go back through the archives at http://darecapital.com/news.htm and review some of the specific investment concepts that have been mentioned in those 20 newsletters, in order to see how things turned out.

Significant trends and events that were mentioned include the weakening of the dollar versus foreign currencies;(June 23,2002) http://www.darecapital.com/news/020627_news.htm

The impending top (from a price perspective) in the bond market (indicating the best time to refinance one's mortgage) (June 27, 2003); http://www.darecapital.com/news/030627_news.htm

The existence of a war premium in the price of oil (January 31, 2003); http://www.darecapital.com/news/030131_news.htm

And the enhanced advantages afforded by owning dividend-paying stocks, courtesy of the Taxpayer Relief Act of 2003 (May 30, 2003). http://darecapital.com/news/030530_news.htm

Specific stocks that have been mentioned include some gainers (in order by date):

    Washington Mutual (WM) at $32.14 a share 9/26/02, now $39.82 (12/17/03)
    Ameritrade (AMTD) at $5.23 a share 12/24/02, now $12.99 (12/17/03)
    Phillip Morris (MO) at $41 a share 12/24/02, now $54.11 (12/17/03)
    Florida Rock (FRK) at $40.84 a share 1/26/02, now $56.10 (12/17/03)
    Sysco Foods (SYY) at $28.10 a share 2/26/03, now $36.35 (12/17/03)
    American Pharma. Partners (APPX) at $27.08 1/30/03, now $33.18 (12/17/03)

One that has run in place:

Pfizer (PFE) at $33.11 8/28/02, now $34.35 (12/17/03)

And one that has gone backwards:

Nokia (NOK) at $19.10 11/26/02 now $17.12 (12/17/03)

The performance of four model portfolios is also tracked on an ongoing basis. Three of the portfolios are concentrated equity portfolios (holding between 20 and 35 stocks), and one is a bond fund portfolio.

The portfolios are designed with low turnover and expenses in mind and the goal of outperforming the broader market over time. The portfolios performed as follows:

The DCM Challenge Portfolio has had a total return of 22.18% since inception 1/15/03 versus a total return of 19.23% for the S&P 500 over the time frame.

The DCM 21st Century Growth portfolio has had a total return of 25.14% since inception 8/28/02 versus a total return of 19.4% for the S&P 500 over the time frame.

The DCM Dividend Value Equity portfolio has had a total return of 15.4% since inception 8/28/03 versus a total return of 19.4% for the S&P 500 over the time frame.

The DCM Fixed Income Portfolio had a total return of 7.34% since inception 8/28/02.

2. "It's the expenses, stupid"; Mutual fund commentary from Paul B. Farrell, CBS MarketWatch (Note: The trend towards increased scrutiny of the mutual fund industry continues. Richard Moore, Treasurer of the State of North Carolina, has been one of the vocal leaders of the charge towards more transparency in fund fee disclosure. This acerbic but well-written piece appeared on the CBS MarketWatch website December 8, 2003.)

Three cheers for the timing and trading charges brought by state attorneys general. But those charges are not the real problem folks ...expenses are the big killer. Fund expenses cost investors $72 billion annually versus a mere $5 billion in damage done by the illegal trading schemes, says Jack Bogle.

Those timing and trading charges are only the tip of a massive iceberg that has ripped open the hull of this totally corrupt mutual fund industry. But watch out! Industry lobbyists are desperately trying to keep Congress focused narrowly on those two issues. Why? Because they want to divert attention from the systemic corruption killing this industry. Critics agree things are worse than you can imagine:

Senator Peter Fitzgerald, R-Ill., says funds are "the world's largest skimming operation." Eliot Spitzer called it a "cesspool." Morningstar's Don Phillips said the industry "has lost its moral compass." Former SEC chairman Arthur Levitt says "the ethical loss is cataclysmic."

The timing and trading scandals exposed the cancer that has been festering for a long time -- toxic expenses. This corrupt industry has been slowly sinking under the heavy muck of its unethical behavior for many years.

And worse yet, fund industry leaders don't think they did anything wrong. They have become so blind to the moral consequences of their behavior they still believe it's okay to do things like give big traders a chance to make big profits at the expense of little buy-and-hold investors.

Indeed, USAToday reports that the arrogant Dick Strong, founder and recently deposed boss of Strong Funds, is known for making "provocative" remarks like: "This is a business, not a church." And, "if I can get away with it, why not?"

And that's exactly what the rest of the industry has been doing for decades. America's fund managers have created a culture that encourages doing whatever they can get away with. And they have tacit permission to do it right out in the open, because they know the SEC and Congress will protect their larcenous behavior.

So the biggest fund company violators just didn't care about getting caught, because the SEC with the support of Congress made sure that "mini-wrist slaps" are all the punishment the violators get, which, while infuriating and discouraging investors, has little effect on the violators.

For example, Morgan Stanley got an itsy-bitsy SEC wrist slap of $50 million in the recent settlement for failing to disclose that they were unethically rewarding brokers for peddling in-house funds. But as BusinessWeek pointed out, that "litigation won't make a dent in profits." Why? Morgan Stanley makes $14 million in net profits every day. So they can afford to be arrogant and continue to find other ways to cheat fund investors to recover those little losses.

Expenses are a huge problem

The industry skims a third off the top of average fund's winnings, says Bogle. Even the past three years, as investors lost over 40 percent on equity funds during the bear market, fund managers were giving themselves an average 35 percent increase in pay.

How do those clever crooks do it? Very easy. One big trick that they've gotten away with for a long time is hiding transaction costs. Actively managed equity funds currently report an average expense ratio in the range of 1.5 percent. But that doesn't include transaction costs.

Ted Aronson, whose firm manages about $14 billion in pension accounts, says that taxable funds spend "another 1.5 percent to 2 percent to buy and sell their stocks each year," which makes it virtually impossible for them to beat the indexes. Still, the fund managers continue skimming off your money at the "fund industry casino," as Bogle, the founder of the Vanguard group of funds, calls it.

Here's how they do it:

Sales commission. Most actively-managed funds are sold by brokers who get a commission in the six percent range. Of course they really don't do a damn thing for you, but the managers give the broker a commission to hustle assets. So deduct at least 0.5 percent to account for the annual impact of the commission.

Cash drag. Actively managed funds have much higher cash reserves than an index fund. The effect of this "opportunity cost" or cash drag is a deduction of another 0.6 percent.

Transaction costs. Fund managers have lots of fun buying and selling stocks, playing big-shot with your money. In fact, the typical turnover ratio is close to 100 percent annually -- that is, they're turning over their entire portfolio every single year. Bogle is a bit more conservative than Aronson in his analysis, and deducts just 0.7 percent for transaction costs.

Management fees and expenses. Now subtract another 1.5 percent for the reported fees and expenses that the fund managers charge investors, including the useless and misleading 12(b)1 marketing fee.

Taxes. But that's not all. Now Uncle Sam wants his cut of the profits in your taxable accounts. And since that depends on an individual's bracket, it could be anywhere up to 2.7 percent. But let's be ultra-conservative at 0.7 percent.

Gross, pretax and after-tax investor return. Let's suppose your fund is generating a nice average gross annual return of 12 percent on total assets over the long term. The commissions, costs, cash drag and fees reduce that to 8.7 percent pretax. In short, the manager has already cost you 3.3 percent. Or to put it another way, the fund is underperforming the market by 3.3 percent. After-tax, what's left for the investor? No more than 8 percent of the original 12 percent is left. Less than two-thirds of your fund's returns get into your pocket, probably much less.

Bad investment? You bet. Most investors would be a lot better off putting their money in safer fixed-income securities, hybrid funds, real estate, gold or directly in stocks.

Lately the news media has put most of the focus on the hot breaking news about the latest indictments by the state attorneys general and the SEC. Please don't be mislead. The real problem with this corrupt industry is expenses, and unfortunately that message is being overshadowed by the indictments. Don't get distracted, stay focused ... or your fund managers will continue robbing you blind.

3. Worthwhile links:

CERTIFIED FINANCIAL PLANNER™ Board of Standards - http://www.cfp.net/default.asp

NAPFA, the National Association of Personal Financial Advisors - http://www.napfa.org/

The FPA's Hampton Roads chapter - http://www.fpahamptonroads.com/

Dare Capital Management & Advisory home page - http://www.darecapital.com/

Whew! That's enough for this issue. Feel free to call or write with questions or comments, or to inquire about my firm's services as they relate to your individual situation--Remember, you deserve to have a positive, rewarding and fulfilling relationship with your financial advisor. If you do not have that, consider making a change!

Best wishes for a rewarding 2004 for you and your loved ones, and good investing,

Will W. Woodard, III, CFP®
Dare Capital Management and Advisory
PO Box 1138
Kill Devil Hills, NC 27948-1138
252.480.0156
will@darecapital.com
www.darecapital.com

Will W. Woodard, III, CFP® is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm based in Kill Devil Hills. Dare Capital Management & Advisory is committed to providing independent, objective, and professional financial advice, specializing in ongoing investment management and comprehensive planning. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or e-mail Will@darecapital.com

The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word!

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns.

The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons.