When you buy and sell many mutual funds over many years, you have regrets. The actions I have taken that have resulted in the greatest regrets are interesting (and the subject of what is now called behavioral finance). Obviously, there were many opportunities to buy what turned out to be great mutual funds, and I missed the opportunity or rejected the choice. I have no particular regrets; some opportunities are missed and in many cases I would have made the same decision again. I bought mutual funds that turned out to be mistakes. Again, I have no particular regrets. In some cases, I viewed the mistake as a learning experience and in other cases I viewed the mistake as just �part of the process�. After all, in retrospect, the difference between the successes and failures was mostly the outcome and that could not have been predicted in advance. I have made two mistakes that grate on me to this day. These two mistakes have generated tremendous regret over the years. In both cases I sold funds too soon. Actually, the mistakes were not that bad, so I leave it as an exercise for those interested in behavioral finance to explain my strong regrets.
The one mistake was at the end of a success, though the mistake made a stronger impression than the success. In February 1977 I bought Mutual Shares Corporation. The manager was a wise old codger, Max Heine. Later, Michael Price showed up in the annual reports as a bright young assistant. One reason I liked Max was that he was a cheapskate. Now other managers might be cheapskates, but Max was thrifty with my money as well as his. In my experience, this is rather unusual since fund companies seem fairly comfortable spending your money. Anyway, Mutual Shares sent out the ugliest, cheapest-looking reports I saw in 35 years of investing. The reports were black and white on mediocre paper; Mutual Shares did not waste money on un-necessary graphics or color. The expense ratio reflected this attitude. Mutual Shares was a great investment. It was not the best performing fund in fast-rising markets but in down and choppy markets, it was a joy to own. Eventually, Michael Price took over as manager and good performance continued. I sold the fund in 1992. Why did I make this mistake? Two factors influenced my decision. One factor was the increasing amount of money managed by Michael Price and his team. This is a proper concern but it is one of the trickiest to evaluate. Certainly you should be concerned with the growth of assets managed in small cap growth stocks; funds investing in larger cap value funds are probably less sensitive to asset growth. Still, Price managed a large amount of money in several funds. The other factor was under-performance. The two factors together influenced me to sell. Now it turns out that the under-performance was real, but deceptive. In retrospect, much of the under-performance was typical of the asset class of value funds. Part of the under-performance was the result of those periodic rough times that all funds under-go. I later recognized my error and owned Mutual Beacon Fund from January 1994 until 1999. I sold when Michael Price left, and fancier reports and higher expenses began to arrive. No regrets then. My sale of Mutual Shares resulted in some tax consequences, but the major loss was the satisfaction I lost since I did not own Mutual Shares for the full period 1977 until 1999. There would have been a great bull market run. The lesson of course: make sure any under-performance is under-performance measured against the appropriate benchmark and lasts for an extended period.
The other mistake was also selling a fund too soon. In January 1979 I bought Sequoia Fund. I bought it for the right reasons: good managers with a respected investment process, reasonable costs, good past performance, and low turnover. In February 1980 I sold Sequoia Fund. Why did I sell what turned out to be one of the all time great funds, which was later closed to new investors for years? Two answers come to mind. One answer is just in-experience. The other answer is that I had not gotten used to the fact that my newly purchased mutual funds always seemed to go down. Thus when performance was not very good, I gave up too easily. I like to think I would not make that mistake again. But this might be wishful thinking. As long as I invest, I will make mistakes.
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